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Jan 9, 2024

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Assignment #8 Name: Anthony Bevilacqua Tutorial Number: 10 Due the week of November 6th at the beginning of tutorial. Please hand in a physical copy of your assignment before tutorial begins. Late assignments will not be accepted. Answers for assignment questions will be provided in tutorial only and not posted to Brightspace. Content for this assignment can be found in your textbook Chapters 12-13. /32 1. What are the two most important sources of revenue for the federal government? /2 The two most important sources of revenue for the federal government are personal income taxes and corporate income taxes, which account for 55.2% and 17.1% of government revenue respectively. 2. Why is the burden of a tax to taxpayers greater than the revenue received by government? /2 The burden of a tax to taxpayers is greater than the revenue received by the government due to the administrative burdens. In order to facilitate the collection of the taxes, government resources to enforce tax laws must be utilized as well as time to fill out tax forms and keep records. 3. Why do some economists advocate taxing consumption rather than income? /2 According to the benefits principle, taxing consumption rather than income means that a taxpayer would only pay for the benefits received from a government service that is funded by taxes. This means that all tax revenue would be put to resources that are relevant to the taxpayer, thus being more equitable. 4. Give two arguments why wealthy taxpayers should pay more taxes than poor taxpayers. /2  According to the ability-to-pay principle, those with a greater ability to pay should be responsible for contributing a larger amount of tax.  Taxing the wealthiest taxpayers maximizes the amount of revenue that can be generated by taxes while reducing the burden on less wealthy taxpayers. 5. What is the concept of horizontal equity, and why is it hard to apply? /2 Horizontal equity is when taxpayers with a similar ability to pay tax contribute the same amount. This is hard to apply due to the difficulty in determining what constitutes a similar ability to pay, as for example, two individuals may have the same income, but one may hold more valuable assets. 6. Government spending in Canada has grown as a share of national income over time. What changes in our economy and our society might explain this trend? Do you expect the trend to continue? /2 The cause of the rise in government spending is likely the result of an increased dependency on social welfare and healthcare system, especially so in the aftermath of the pandemic. This trend is likely to continue due to Canada’s aging population, and more people will have to rely on the healthcare system as the result of their age.

7. Explain how individuals’ behaviour is affected by the following features of tax laws. /3 a. Contributions to charity are tax deductible. Individuals would be influenced to donate more to charity. b. Sales of beer are taxed. Individuals would be influenced to not buy beer or buy less beer. c. Realized capital gains are taxed, but accrued gains are not. (When someone owns a share of stock that rises in value, she has an “accrued” capital gain. If she sells the share, she has a “realized” gain.) Individuals would be influenced to hold onto more of their shares instead of selling them. 8. Suppose that your province raises its sales tax from 7 percent to 8 percent. The government forecasts a 20 percent increase in sales tax revenue. Is this plausible? Explain. /2 This projection is not plausible, as it does not align with how economic behaviour changes after a tax. For this projection to come true, there would have to be no change in total spending. However, since a tax raises the price of goods and services in the market, the tax would influence spending to decrease in response to that higher price. Even if tax revenue were to eclipse the deadweight loss of a tax, a 20% increase is much too high to be within the realm of possibility. 9. Categorize each of the following funding schemes as examples of the benefits principle or the ability-to-pay principle. /3 a. Visitors to many national parks pay an entrance fee. Benefits Principle b. Local property taxes support elementary and secondary schools. Ability-to-Pay Principle c. An airport trust fund collects a tax on each plane ticket sold and uses the money to improve airports and the air traffic control system. Benefits Principle 10. What is the relationship between a firm’s total revenue, profit, and total cost? /2 Profit is equal to a firm’s total revenue minus subtracted by it’s total cost. 11. What is marginal product, and what does it mean if it is diminishing? /2 Marginal product is the increase in resources generated that results from producing one additional quantity of product. Diminishing marginal product is when resources generated decreases when producing one additional quantity of product.

12. Your aunt is thinking about opening a hardware store. She estimates that it would cost $500 000 per year to rent the location and buy the stock. In addition, she would have to quit her $50 000 per year job as an accountant. /2 a. Define opportunity cost. Opportunity cost is the opportunity’s that are sacrificed when choosing to partake in one action over another. b. What is your aunt’s opportunity cost of running a hardware store for a year? If your aunt thought she could sell $510 000 worth of merchandise in a year, should she open the store? Explain. My aunt’s opportunity cost of running a hardware store for a year would be the $50,000 sacrificed from her accounting job. If it is projected that she could $510,000 worth of merchandise in a year, she should not open the store because the cost to run the store plus the opportunity cost is greater than her potential revenue. 13. A commercial fisherman notices the following relationship between hours spent fishing and the quantity of fish caught: /6 Hours Quantity of Fish (in kilograms) 0 0 1 10 2 18 3 24 4 28 5 30 a. What is the marginal product of each hour spent fishing? The marginal product decreases by two as each hour of fishing passes, e.g. MP = 10 at hour 1, MP = 8 at hour 2. b. Use these data to graph the fisherman’s production function. Explain its shape. c. The fisherman has a fixed cost of $10 (his pole). The opportunity cost of his time is $5 per hour. Graph the fisherman’s total-cost curve. Explain its shape.

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