Question

Suppose buyers of vodka are required to send $5.00 to the government for every bottle of vodka they buy. Further, suppose this tax causes the effective price received by sellers of vodka to fall by $3.00 per bottle. Which of the following statements is correct? A. Sixty percent of the burden of the tax falls on sellers. B. This tax causes the demand curve for vodka to shift downward by $5.00 at each quantity of vodka. C. The price paid by buyers is $2.00 per bottle more than it was before the tax. D. All of the above are correct.

Answer 1

Answer:

Option D is correct

Explanation:

The reason is that increase in tax lowers the demand of the products. When the government imposed additional taxes on vodka, the demand will obviously fell. Now the vodka manufacturing company in retaliation of imposed taxes, will have to lower its price to still attract its customers. Now the difference in this ($3) decrease in price and ($5) increase in taxes is $2 additional cost per unit, which the buyer will have to bear. This means sixty percent of the additional cost (3/5*100) will be beared by the vodka seller. The increase in prices of the Vodka will decline the demand of the product, which means fewer products would be sold.