Suppose that the U. S. government decides to charge wine consumers a tax. Before the tax, 25 million bottles of wine were sold every month at a price of $7 per bottle. After the tax, 18 million bottles of wine are sold every month; consumers pay $8 per bottle (including the tax), and producers receive $5 per bottle.

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 had been levied on producers.

The correct answer for the first scenario is total tax = $3, tax on consumer = $1 and tax on producer = $2.

For the second scenario, the answer will be False.

Explanation:

According to the scenario, given data is:

Price for consumer before tax = $7

Price for consumer after tax = $8

Price producer gets before tax = $7

Price producer gets after tax = $5

So, the amount of tax = Price consumer pay after tax - Price producer gets after tax.

= $8 - $5 = $3

Burden of tax on consumer = Price after tax for consumer - price before tax for consumer

= $8 - $7 = $1

Burden of tax on producer = Price producer gets before tax - Price producer gets after tax

= $7 - $5 = $2

For the second scenario, given statement will be false because the result will be same if the tax is levied on producer or consumer.