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

Question

Suppose that the U.S. government decides to charge wine consumers a tax. Before the tax, 10,000 bottles of wine were sold every week at a price of $4 per bottle. After the bottle. tax, 4,000 bottles of wine are sold every week; consumers pay $7 per bottle (including the tax), and producers receive $1 per The amount of the tax on a bottle of wine is s burden that falls on producers is per bottle Of this amount, the burden that falls on consumers is per bottle, and the 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 producers True False

Explanation / Answer

Before tax price = $ 4

After tax price = $ 7

Consumer is paying extra $ 3

Producer is getting only $ 1, hence ; producer pays $ 3

the amount of the tax on a bottle of wine $ 6 per bottle. Of this amount, the burden tha falls on consumer is $ 3 per bottle, and the burden on producers is $ 3 per bottle.

Elasticity of demand = % change in Q / % Change in P

= 60 % /75 %

= 0.8

Hence this is true statement.

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