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31 August, 17:16

Suppose that the U. S. government decides to charge wine producers a tax. Before the tax, 25 billion bottles of wine were sold every year at a price of $5 per bottle. After the tax, 18 billion bottles of wine are sold every year; consumers pay $6 per bottle, and producers receive $3 per bottle (after paying the tax). 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 has been levied on consumers. True False

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  1. 31 August, 17:33
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    Explanation and Solution:

    The occurrence of tax applies to the difference between manufacturers and users of tax and is focused on the market elasticity of demand and supply.

    Increase the fiscal burden on consumers when supply is much more elastic than demand and when demand is much more elastic than supply, more fiscal burden on producers is reduced.

    As for the wine issue, before the tax and wine sales were 25 million bottles a month for $5 a bottle, the US government agreed to impose a tax on wine. The wine taxes are reduced to 18 million bottle per month, mirrored in the left-hand change from SS to S1S1 in the wine supply curve, with customers now paying 6 dollar (including tax) per bottle, with suppliers now earning 3 dollars per bottle.

    Tax = Price paid by consumers - Price received by producers = $6-$3 = $3

    Burden falls on consumers = Price paid after tax - Price paid before tax

    =$6-$5 = $1

    Burden falls on producers = Price received before tax - Price received after tax = $5-$3

    =$2
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