Eco204 Paper

University of Toronto | Department of Economics | ECO 204 | 2012 - 2013 | Ajaz Hussain INDIVIDUAL PAPER 1 INSTRUCTIONS

The purpose of this individual paper is to develop your analytical, reasoning, and writing skills. Please read the CBC News article, “TTC Board Approves Fare Hike, Contracts Out Cleaning” (full link in footnote1) and write a (max) two page paper on the following modification to the article: You have been hired by the Toronto City Council to write an advisory report on the economic impact of raising fares to finance the expansion of public transit. You will suppose that all consumers/residents of the City of Toronto have identical preferences over these two “good” goods perceived as imperfect substitutes: TTC transportation (good 1) and “all other goods” (good 2). Since all residents are assumed to be identical, you can model them by a single “representative” consumer. Assume that the representative consumer has an annual income of $50,000, the price of a TTC token is $2.60, and the price of “all other goods” is $100. You’re informed that the representative consumer spends 25% of income on TTC transportation and the remaining 75% on “all other goods”. Start by explaining the impact of the proposed TTC fare increase mentioned in the CBC News article on utility and the demand for TTC transportation and all other goods (you can treat the fare increase as an excise tax on TTC transport services). Remember that you’re writing this report for a group of politicians who are not trained in microeconomics and as such you shouldn’t use technical jargon or math in your paper (of course, you are free to use math in your analysis). Next, examine this alternative proposal to the TTC fare increase: a lump sum income tax on every resident of the City of Toronto where the lump sum is designed to raise the same amount of revenue as the proposed TTC fare increase. Is this flat income tax on all Toronto residents “better” than the proposed TTC fare hike? Submitting...