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You are an economic advisor to the U.S. Government Accountability Office (GAO) of the Federal Government. The GAO has been asked by President Obama to find ways to generate more government revenue. One proposal under consideration is to add an additional excise tax to bottles of wine. While the price of wine varies, the average price of a bottle of wine is $10. Approximately 10 million bottles of wine are sold in the U.S. each year. Wine is a normal good. The price elasticity of demand for wine is -0.8 and the price elasticity of supply for wine (in the short-run) is 0.4, but 1.2 in the long run (over time). Your colleague at the GAO proposes the following, "let's impose a $2 per bottle excise tax on wine. This will cause the average price of wine to increase to $12 and generate approximately $20 million in government revenue." As economic advisor, your colleague asks you to proof the report and make any changes before handing it over to the President.

Prepare a one page double spaced written response to your colleague commenting on his report. Provide a large well labelled graph to help illustrate your points.

Microeconomics, Economics

  • Category:- Microeconomics
  • Reference No.:- M939564

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