Question

Suppose that the U.S. government decides to charge beer consumers a tax. Before the tax, 30,000 cases of beer were sold every week at a price of 7 per case. After the tax, 24,000 cases of beer are sold every week; consumers pay $8 per case (including the tax), and 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.

•  True

•  False

Answer 1

ANSWER:

Tax on a case of beer = amount consumers pay after the tax has been levied - amount producers receive = $8 - $4 = $4

Burden on consumers = amount consumers pay after the tax has been levied - amount consumers pay before tax was levied = $8 - $7 = $1

Burden on producers =  Tax on a case of beer - Burden on consumers = $4 - $1 = $3

False as the producers are already bearing more of the brunt of the tax.

Answer 2

Suppose that the U.S. government decides to charge cola consumers a tax. Before the tax, 15 million cases of cola were sold every month at a price of $4 per case. After the tax, 8 million cases of cola are sold every month; consumers pay $5 per case (including the tax), and producers receive $2 per case.

The amount of the tax on a case of cola is

$3

per case. Of this amount, the burden that falls on consumers is

$1

per case, and the burden that falls on producers is

$2

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 producers.

True

False

Answer 3

6. Who should pay the tax?

The following graph shows the labor market for research assistants in the fictional country of Academia. The equilibrium wage is $10 per hour, and the equilibrium number of research assistants is 250.

Suppose the government has decided to institute a $4-per-hour payroll tax on research assistants and is trying to determine whether the tax should be levied on the employer, the workers, or both (such that half the tax is collected from each side).