Suppose that the U. S. government decides to charge wine consumers a tax. Before the tax, 25 million bottles of wine were sold every month at a price of $7 per bottle. After the tax, 18 million bottles of wine are sold every month; consumers pay $8 per bottle (including the tax), and producers receive $5 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 smaller if the tax had been levied on producers.

True

False

False

Explanation:

Since the sum of money paid by consumer is $8 per bottle and the sum of money that is been paid by the manufacturer is $5 per bottle.

This means the sum of tax on wine will be $3 = ($8 – $5) per case.

prior to tax, the cost of buying the bottle of wine is $7. Calculating the tax burden on consumers and on producers, are as follows:

Tax burden on consumers = Price paid after tax - Price paid before tax

                                          = $8-$7

                                      = $1

Tax burden on producers = Price received before tax - Price received after tax

                                            = $7-$5

                                            = $2

consequently, the burden of tax that the consumers are expected to pay is $1 per bottle and the burden of tax that the producer is expected to pay is $2 per bottle.

The given statement in the question is False. Regardless of whether the tax is levied on consumers or producers, the effect is the same.

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