Question

Suppose that the U.S. government decides to charge wine producers a tax. Before the tax, 10 million bottles of wine were sold every month at a price of $4 per bottle. After the tax, 3 million bottles of wine are sold every month; consumers pay $7 per bottle, and producers receive $2 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

Answer 1

price after tax paid by consumer = $7

price after tax received by producer = $2

so tax = $7 - $2 = $5 , so The amount of the tax on a bottle of wine is -$5----per bottle.

earlier consumer paid $4 , now he pays $7 , so increased payment = $3

earlier producer received $4 and now he receives $2 , burden = $4 - $2 = .$2

Of this amount, the burden that falls on consumers is----$3---per bottle, and the burden that falls on producers is---$2---per bottle.

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

because in current scenario $5 are shared by both producer and consumer , but if the entire tax of $5 was levied on consumer , so fall in quantity would have been more .