Suppose that the U. S. government decides to charge cola consumers a tax. Before the tax, 20 million cases of cola were sold every month at a price of $5 per case. After the tax, 13 million cases of cola are sold every month; consumers pay $6 per case (including the tax), and producers receive $3 per case.

The amount of the tax on a case of cola 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.

The effect of the tax on the quantity sold would have been larger if the tax had been levied on consumers.

a. True
b. False

$3

$1

$2

a. True

Explanation:

If consumers are paying $6 per case and producers are receiving $3 per case, then the amount of tax on a case of cola is $3.

If the pre-tax price to the consumer was $5, and the post-tax price is $6, the burden that falls on consumers is $1 per case.

The remaining of the $3 taxed amount must fall on producers, which is $2 per case.

If an $1 increase in prices caused consumption to fall from 20 million to 13 million cases per month, an even greater increase in price (in case taxes were levied on consumers), would represent an even greater decrease in demand. Therefore, the statement is true.

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