Econ 240

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 I_P 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).