please help? Suppose that the U.S. government decides to charge cola producers a

Question

please help? Suppose that the U.S. government decides to charge cola producers a tax. Before the tax, 35 billion cases of cola were sold every year at a price of $5 per case. After the tax, 28 billion cases of cola are sold every year; consumers pay $6 per case, and producers receive $3 per case (after paying the tax). The amount of the tax on a case of cola is per case. Of this amount, the burden that falls on consumers is per case, and the burden that falls on producers is per case. 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

Explanation / Answer

(a)

Amount of tax per case = Consumers price - Producers Price = $(6 - 3) = $3

Increase in price for consumers = $(6 - 5) = $1 [Burden on consumers]

Decrease in price for producers = $(5 - 3) = $2 [Burden on producers]

(b) FALSE

If tax was levied on consumers, demand would have decreased more. Actually, effect on quantity sold would be small if the tax burden is borne equally by consumers and producers.

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