Explain why each of the following statements is True, False, or Uncertain according to economic principles.
Use diagrams where appropriate. Unsupported answers will receive no marks. It is the explanation that is important.
1. Suppose that Ian and Mike are cottagers on opposite sides of a small lake. Ian values electricity at his cottage at $500 and Mike at $700, but in order to get electricity for their properties a trunk line costing $1000 must be built. If they are unable to negotiate the trunk line will never be built, but if they can causelessly negotiate to split the costs, it will be built.
2. Suppose the tax rate on the first $20,000 of income is 20%, and on any income above that is 25%. This tax is progressive. [Hint: Consider two taxpayer, one earning $20,000, and the other $40,000]