Question

Please help!

5. Calculating tax incidence Suppose that the U.S. government decides to charge beer consumers a tax. Before the tax, 40 million cases of beer were sold every month at a price of $7 per case. After the tax, 34 million cases of beer are sold every month; consumers pay $8 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 the same as if the tax had been levied on producers. True o False Grade It Now Continue Continue without saving

Answer 1

Before tax:

Quantity traded = 40 million of beer

Price = $7

Tax imposed on consumers:

Quantity traded= 34 million of beer

Price consumer pay = $8 (Tax paid by consumers = $8 - $7 = $1)

Price Producers Receive = $4 (Tax Paid by Producers = $7 - $4 = $3)

Tax = Price Consumer Pay - Price Producers Receive (Money collected by government in the form of tax)

Tax = $8 - $4 = $4

The amount of the tax on a case of beer is $4. Of this amount, the burden that falls on consumers is $1 and burden that falls on producers is $3.

True, the effect of tax on quantity sold would have been the same if the tax had been levied on producers because burden of tax is dependent on the elasticity of consumer demand and producer surpply. If producer supply is more inelastic than consumer demandm, more tax would fall on producer and vice versa. Thus, burden of tax would be same, no matter on whom it is imposed, it will be divided as per their elasticity.