Question

Suppose that the U.S. government decides to charge beer consumers a tax. Before the tax, 15 billion cases of beer were sold every year at a price of $7 per case. After the tax, 9 billion cases of beer are sold every year; consumers pay $10 per case (including the tax), and producers receive $4 per case.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 larger if the tax had been levied on producers.

Answer 1

Answer:

1. $6

2. $3

3. $3

4. False

Explanation:

1. Given that:

Price that consumers pay = $10

Price that Producers receive after tax =$4

The amount of the tax on a case of beer = Price that consumers pay - Price that Producers receive after tax

The amount of the tax on a case of beer = $10 - $4 = $6

The amount of the tax on a case of beer is $6 per case

2. Given that:

Price that beer is sold before tax = $7

Price that consumers pay including tax  = $10

the burden that falls on consumers = Price that consumers pay including tax  - Price that beer is sold before tax = $10 - $7 = $3

The burden that falls on consumers is $3 per case,

3. Given that:

Price that beer is sold before tax = $7

Price that Producers receive after tax =$4

The burden that falls on producers = $7 - $4 =$3

The burden that falls on producers is $3 per case.

4. We can use he elasticity of demand to determine this.

Elasticity of demand = (Δquantity / ΔPrice)×(Price before tax/Quantity before tax)

Elasticity of demand = (($9 billion - $15 billion)/($10 - $7))×($7/$15 billion)

Elasticity of demand = -$14 billion/$15 billion = -0.93

Now when the elasticity of demand is negative as above, according to the law of demand, this means that when the price of goods increase, the demand will decrease. Therefore, if the tax had been levied on producers they will increase the price of goods leading to a decrease in demand and subsequently a smaller quantity of goods sold. So the effect of the tax on the quantity sold would have been larger if the tax had been levied on producers is false.

Answer 2

Answer:

A) $6

B) $3

C) $3

D) FALSE

Explanation:

being the price $10 but, produced only reciving $4 the tax in favor ofthe government is for the difference: 10 - 4 = 6

the price increase to $10 from $7 as a result of taxation the burden in consumer is $3

the produced received $7 while now they receive $4 their burden is aso $3

The tax burden has no relationship with legislation but, with the forces of demand and supply. In this case, the ellasticity is balanced and the consumer elasticity to decrease their demand at increases in price makes the suppliers take a hit in order to save their business.

If the producer would have tried to move-forward their taxes the demand would have dropped heavily making this estrategy unuseful.