Question

Suppose that the U.S. government decides to charge wine consumers a tax. Before the tax, 30 million bottles of wine were sold every month at a price of $4 per bottle. After the tax, 25 million bottles of wine are sold every month; consumers pay $6 per bottle (including the tax), and producers receive $3 per bottle.
The amount of the tax on a bottle of wine is $_______ per bottle. Of this amount, the burden that falls on consumers is $________ per bottle, and the burden that falls on producers is $______ per bottle.

The effect of the tax on the quantity sold would have been smaller if the tax had been levied on producers.
a. True
b. False

Answer 1

Answer:

Explanation:

The amount of the tax on a bottle of wine is $3 per bottle.

Of this amount, the burden that falls on consumers is $2 per bottle, and the burden that falls on producers is $1 per bottle.

The effect of the tax on the quantity sold would have been smaller if the tax had been levied on producers.  False

a. True

b. False

Answer 2

Answer:

$3

$2

$1

False

Explanation:

The burden of tax refers to who pays the tax between the buyer and the seller.

More burden of tax usually falls to the party with the more inelastic demand because the quantity demanded would not change despite the increase in price as a result of the tax.

To find the amount of tax per bottle = price of wine - amount received by producers = $6 - $3 = $3

The amount paid by consumers = price after tax - price before tax = $6 - $4 = $2

Amount received by sellers = tax- amount paid by consumers = $3 - $2 = $1

It can be seen that consumers bear a higher burden of tax because they pay the greater tax. This means they have an inelastic demand.

If the tax had been levied on producers, the effect on quantity demanded would have been greater because producers have a more less elastic supply when compared to consumers .

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