Stacy places a $20 value on a bottle of wine,and Andrea places a $17 value on it.The equilibrium price for a bottle of wine is $15.Suppose the government levies a tax of $1 on each bottle of wine,and the equilibrium price of a bottle of wine increases to $16.How much tax revenue is collected?

Question

Quizplus · Accepted Answer

Before the tax, the equilibrium price was $15, but with the tax, the new equilibrium price is $16. This means that the buyers are now paying $1 more per bottle, and the sellers are receiving the same amount they did before the tax ($15) plus the amount of the tax ($1), which makes their revenue per bottle $16.

To determine the tax revenue, we need to find out how many bottles of wine are being sold. This can be calculated by looking at the quantity demanded and supplied at the new equilibrium price of $16. Since there is no information given about the quantities, we can assume that the quantity demanded and supplied is the same (as is the case at the equilibrium price), and call this quantity "Q."

The amount of tax revenue generated is equal to the tax per bottle multiplied by the quantity sold. In this case, the tax per bottle is $1, and the quantity sold is Q. Therefore, the total tax revenue collected is:

Total tax revenue = $1 x Q

We know that Q is being sold at a price of $16 per bottle, but we don't know what Q actually is. However, we can use the information given about the values that Stacy and Andrea place on a bottle of wine to estimate the quantity demanded and supplied at the equilibrium price of $15.

At $15 per bottle, Stacy would be willing to buy exactly one bottle, since that is the maximum price she places on it. Andrea would be willing to buy a bottle at that price, too, but since the equilibrium price is determined by the intersection of demand and supply curves, we can assume that there are sellers who are willing to sell bottles for less than $15 (e.g., $14 or $13). Assuming that there are enough sellers willing to sell at these lower prices, we can assume that the quantity demanded and supplied at the equilibrium price of $15 is greater than one.

To make a conservative estimate, let's assume that the quantity demanded and supplied at $15 is just two bottles. This means that, at $16 per bottle, the quantity demanded and supplied will likely be lower than two (since buyers will be less willing to pay the higher price, and sellers may not be motivated to produce as much at a lower cost). Again, to make a conservative estimate, let's assume that the quantity demanded and supplied at $16 is just one bottle.

Therefore, the total tax revenue collected is:

Total tax revenue = $1 x 1 bottle
Total tax revenue = $1

However, the question asks how much tax revenue is collected "if the government levies a tax of $1 on each bottle of wine, and the equilibrium price of a bottle of wine increases to $16." Since the tax is $1 per bottle, the total tax revenue collected when one bottle is sold at $16 is also $1.

But we're not done yet! The question asks us how much tax revenue is collected, implying that there could be a scenario where no tax revenue is collected. To see if this is the case, we would need to know the quantity demanded and supplied at the $16 price point, and determine if that quantity is zero. Since we assumed that at least one bottle is being sold, we can safely eliminate choice A) $0 from consideration.

Therefore, the correct answer is C) $2.

Stacy Places a $20 Value on a Bottle of Wine,and