Question

# 5. Calculating tax incidence Suppose that the U.S. government decides to charge wine producers a tax....

5. Calculating tax incidence

Suppose that the U.S. government decides to charge wine producers a tax. Before the tax, 15,000 bottles of wine were sold every week at a price of \$7 per bottle. After the tax, 10,000 bottles of wine are sold every week; consumers pay \$9 per bottle, and producers receive \$6 per bottle (after paying the tax). 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.

True or False: The effect of the tax on the quantity sold would have been smaller if the tax had been levied on consumers. True False

Equilibrium price = 7 and equilibrium quantity = 15000

After tax Price = 9 and quantity = 10000

1. The amount of tax on a bottle of wine is 3 ( consumer pay 9 – producer receives 6)

2. The burden of tax on buyer is 2\$ per bottle (consumer pay 9 – equilibrium price 7)

3. The burden of tax that falls on producer is 1\$ per bottle (equilibrium price 7 – producer receives 6)

4. The statement is False. If whole tax is levied on consumers than the deadweight loss will be larger.

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