Question

5. Calculating tax incidence Suppose that the U.S. government decides to charge beer producers a tax. Before the tax, 40 billion cases of beer were sold every year at a price of $7 per case. After the tax, 34 billion cases of beer are sold every year; consumers pay $8 per case, and producers receive $4 per case (after paying the tax). The amount of the tax on a case of beer 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 the same as if the tax had been levied on consumers. True False Grade It Now Save & Continue Continue without saving

Answer 1

Answer:

a) 4 dollar

b) 1 dollar

c) 3 dollar

d) FALSE the decrease would have been greater.

Explanation:

8 dollar sales price - 4 dollar received from producer = 4 dollar tax on beer per case

burden for consumer per case: from 7 to 8 = 1 dollar per case

the produced will have to burden 3 dollar per case

to an increase of 1/7

the demand decreased 6/40

price elasticity of demand  (-6/40) /  (1/7)  = -1.05

If tax was levied on consumers then price would go from 7 to 11

X / (4/7) = -1.05

X = -0.6

-a/40 = -0.6

-a = 24

The demand would decrease by 24 billon cases which is much higher than the 6 billion it decrease from the produced tax.