Write 5 short essays answering the 5 questions in the assignment attached. All the requirements and instructions are in the assignment.
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Fall, 2020
Instructions: The assignment is due November 27, 2020 at 11:30pm EST. It should be uploaded to the
OnQ course page in Word or PDF format by that time. The assignment should have a cover page with
the names and student numbers of all contributors. You may work singly or in groups of two. This
assignment requires some graphical analysis. Please ensure that all graphs are legible and fully
explained.
Question One (20 marks)
Assume that the market for a good can be segregated into two segments, each with a different elasticity
of demand (eg. travel for pleasure versus business). Initially, each market segment charges the same
price and has the same output. Illustrate and explain how the two segments will be differentially
affected by a unit tax levied at the rate of $t per unit.
Question Two (20 marks)
Use a consumer choice model of leisure and consumption to explain and illustrate the following
proposition. A proportional tax levied at rate t0 on income will generate more tax revenue than a
progressive tax levied at rate t1 on income where the two taxes leave the consumer on the same level of
utility. The progressive tax is structured as follows: the first (T-R0)w dollars of income are exempt from
tax and the remainder is taxed at the rate t1< t0.
Question Three (20 marks)
Consider a two-period consumption model where the present endowment of income is IP and the future
endowment of income is zero. Show an initial bundle for a consumer who is a saver. The government
now introduces a mandatory public pension plan financed by a premium (tax) of $T. Assume that the
taxes collected in the present period are returned to consumers in the future period with a return equal
to the going interest rate, r. Explain and illustrate how this pension plan affects the consumer, including
his/her private savings. How and why would your answer change under the assumption that the public
pension offers a return less than the current interest rate?
Question Four (20 marks)
One way to implement a personal consumption tax is to exempt capital income from the current
personal income tax. However, several other approaches have been posited. The first uses current year
expenditures on both durable and non-durable goods and services. The second is known as the
consumption service base and includes expenditure on non-durables plus the imputed flow of
consumption services from the durable asset. As an example, if you buy a stove for $2000 this year and
it is expected to provide “stove services†over the next ten years, then you would include $200 of stove
services in the tax base for each of the next ten years. Compare the two bases in terms of their viability
and pattern of tax liability over time. What problems arise? Why might the expenditure approach be
combined with the capital-income exempt base for the treatment of assets that are used for savings.
How would it work?
Question Five (20 marks)
Economists are very much opposed to the use of government tax dollars to subsidize the construction of
sports stadiums used by professional sports teams. Outline the reasons for such opposition. (Two page,
double-spaced maximum).
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