Question

5. Calculating tax incidence Suppose that the U.S. government decides to charge cola consumers a tax. Before the tax, 35 million cases of cola were sold every month at a price of $6 per case. After the tax, 29 million cases of cola are sold every month; consumers pay $7 per case (including the tax), and producers receive $3 per case. The amount of the tax on a case of cola is $ per case. Of this amount, the burden that falls on consumers is $ per case, and the burden that falls on producers is $ per case. True or False: The effect of the tax on the quantity sold would have been smaller if the tax had been levied on producers. True False g

Answer 1

Answer:

$4

$1

$3

False

Explanation:

Tax on a case of beer = amount consumers pay after the tax has been levied - amount producers receive = $7 - $3 = $4

Burden of tax on consumers = amount consumers pay after the tax has been levied - amount consumers pay before tax was levied = $7 - $6 = $1

Burden of tax on producers =  Tax charged - Burden of tax on consumers = $4 - $1 = $3