Suppose that the U.S. government decides to charge wine consumers a tax. Before the tax, 10 billion bottles of wine were sold every year at a price of $4 per bottle. After the tax, 4 billion bottles of wine are sold every year; consumers pay $7 per bottle (including the tax), and producers receive $1 per bottle.

Question

Suppose that the U.S. government decides to charge wine consumers a tax. Before the tax, 10 billion bottles of wine were sold every year at a price of $4 per bottle. After the tax, 4 billion bottles of wine are sold every year; consumers pay $7 per bottle (including the tax), and producers receive $1 per bottle.

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 larger if the tax had been levied on producers.

True
False

I got $6 in tax. $3 on consumer and $1 on producers. But I don't think this is right. Please help!

Answer 1

To find the amount of the tax per bottle, we need to calculate the difference between the price consumers pay after the tax and the price per bottle before the tax:

Tax per bottle = Price after tax per bottle - Price before tax per bottle

In this case, consumers now pay $7 per bottle, while before the tax, the price was $4 per bottle. Therefore, the tax per bottle is:

Tax per bottle = $7 - $4 = $3

So, the amount of the tax on a bottle of wine is $3 per bottle.

Now, let's determine the burden that falls on consumers and producers.

To calculate the burden on consumers, we need to compare the price consumers pay after the tax with the price before the tax:

Burden on consumers per bottle = Price after tax per bottle - Price before tax per bottle

In this case, consumers now pay $7 per bottle, while before the tax, the price was $4 per bottle. Therefore, the burden on consumers per bottle is:

Burden on consumers per bottle = $7 - $4 = $3

So, the burden that falls on consumers is $3 per bottle.

To find the burden on producers, we need to calculate the difference between the price producers receive after the tax and the price before the tax:

Burden on producers per bottle = Price before tax per bottle - Price producers receive after tax per bottle

In this case, before the tax, producers received $4 per bottle, while after the tax, they receive $1 per bottle. Therefore, the burden on producers per bottle is:

Burden on producers per bottle = $4 - $1 = $3

So, the burden that falls on producers is $3 per bottle.

Therefore, both the burden on consumers and the burden on producers are $3 per bottle.

Regarding the true/false statement, let's consider the impact of the tax on the quantity sold. In this case, the quantity sold decreases from 10 billion bottles before the tax to 4 billion bottles after the tax. The quantity sold decreased by 6 billion bottles.

If the tax had been levied on producers, it might have affected production costs for the producers, which could have led to a decrease in the quantity supplied. However, in this scenario, the tax is levied on consumers, and the quantity sold still significantly decreases.

Therefore, the statement is false. The effect of the tax on the quantity sold would not necessarily have been larger if the tax had been levied on producers.

Answer 2

To calculate the amount of the tax on a bottle of wine, we need to find the difference between the price before and after the tax.

Before the tax, the price was $4 per bottle and after the tax, consumers pay $7 per bottle. Thus, the tax amount is $7 - $4 = $3 per bottle.

The next step is to determine the burden that falls on consumers and producers. In this case, the burden that falls on consumers is the increase in price after the tax is imposed, which is $7 - $4 = $3 per bottle. The burden that falls on producers is the decrease in revenue per bottle, which is $4 - $1 = $3 per bottle.

Therefore, the amount of the tax on a bottle of wine is $3 per bottle. The burden on consumers is $3 per bottle, and the burden on producers is also $3 per bottle.

As for the True or False statement, it is False. The effect of the tax on the quantity sold would not have been larger if the tax had been levied on producers. The quantity sold decreased from 10 billion bottles to 4 billion bottles, regardless of whether the tax was levied on consumers or producers.

Answer 3

Something is missing from the question. It does not tell us what producers received before the tax was levied. For the second, true-false, question, one must assume that the cost of the tax will ultimately be paid by the consumer. The producer will raise prices to recoup the tax if it is levied on the producer, so the net effect on sales would be the same. If the producer decided to assume some of the cost of the tax itself and not raise prices to match the tax, the effect on sales might be mitigated. We don't know that from the question.