5) 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 elasticity of demand for wine is .8 and the elasticity of supply for wine is .4.

a. Your colleague proposes to generate a $2 per bottle tax on wine. He claims this will cause the average price of wine to increase to $12 and generate approximately $20 million in government revenue. Do you think he is correct with his prediction on price and tax revenue projections? Explain why you agree or disagree.

b. Who bears the bigger share of the tax burden in this scenario? Explain why.