uppose that the U.S. government decides to charge wine consumers a tax. Before t

Question

uppose that the U.S. government decides to charge wine consumers a tax. Before the tax, 35 million bottles of wine were sold every month at a price of $5 per bottle. After the tax, 30 million bottles of wine are sold every month; consumers pay $7 per bottle (including the tax), and producers receive $4 per bottle.

The amount of the tax on a bottle of wine isper bottle. Of this amount, the burden that falls on consumers isper bottle, and the burden that falls on producers isper bottle.

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

True

False

Explanation / Answer

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

Ans : Of this amount, the burden that falls on consumers is $ 2 per bottle.

Ans: Of this amount, the burden that falls on producers is $ 1 per bottle.

Explanation :

Consumer pays = $5 ( Before tax is imposed )

Consumer pays = $7 ( After tax is imposed )

So tatal tax paid by consumer = $7 - $5 = $2

Producer reveives = $ 5 ( Before tax is imposed )

Producer reveives = $ 4 ( After tax is imposed )

So tatal tax paid by producer = $5 - $4 = $1

Per unit tax = Price pays by consumers - Price recieves by producers

Ans: True

Explanation:

Tax on producers raises the cost of production.If tax is leived on producer then the supply curve will shift to the left causing less supply in the market. So , the effect of the tax on the quantity sold would have been larger if the tax had been levied on producers.

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