Suppose that the U.S. government decides to charge wine consumers a tax. Before the tax, 15 million bottles of wine were sold every month at a price of $7 per bottle. After the tax, 9 million bottles of wine are sold every month; consumers pay $10 per bottle (including the tax), and producers receive $4 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.

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Asked Sep 24, 2019
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Suppose that the U.S. government decides to charge wine consumers a tax. Before the tax, 15 million bottles of wine were sold every month at a price of $7 per bottle. After the tax, 9 million bottles of wine are sold every month; consumers pay $10 per bottle (including the tax), and producers receive $4 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.
 
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Expert Answer

Step 1

Tax incidence refers to the proportion in which tax is shared by the producer and consumer and it is based on the price elasticity of demand and supply.

When supply is more elastic than demand then more tax burden falls on consumer and when demand is more elastic than supply then more tax burden falls on producer.

Step 2

As per the question, the US government decided to charge tax on wine and before the tax, the wine sale was 15 million bottles every month at a price of $7 per bottle. When the tax is imposed the wine sale falls to 9 million bottle every month, w...

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Price of wine (in dollars) S1 D $10 $7 $4 S1 9 15 Quantity of wine (In million)

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