Suppose the pre-tax price of cigarettes is $3.00 per pack and the post-tax price is $4.00 per pack.The tax is $1.50 per pack and is paid to the government by cigarette retailers.Six hundred packs were sold prior to the tax increase; 500 were sold after the tax.What is the producer tax burden?

Question

Quizplus · Accepted Answer

The producer tax burden is the difference between the pre-tax price and the post-tax price minus the tax amount. Here, it's $4.00 - $3.00 - $1.50 = -$0.50. However, since the tax cannot be negative, it indicates that the full tax burden ($1.50) is passed to consumers, and producers absorb a price decrease to maintain demand. The correct interpretation is that producers effectively receive $0.50 less per pack than they did before the tax, making A the correct choice.

Suppose the Pre-Tax Price of Cigarettes Is $3