microbook_3e-page99

microbook_3e-page99 - x Method #2 It is now more costly to...

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: x Method #2 It is now more costly to hold stock B, so you can think of the tax as increasing the price of stock B from $1 to $2, while leaving the return unchanged * . The slope of each isocost line changes . Once again, you end up on a lower isoquant, since you can no longer earn a $100 return. You can only earn a $50 return. Even though method #1 more accurately describes the case of taxing asset returns, Ill use method #2 in this analysis because my goal is to eventually describe the taxation of land and capital. asset returns the case of perfect complements Once again, imagine that the price of stock A and the price of stock B are both $1 and that you have $1000 to invest, so that the initial isocost line is drawn from 1000 shares of stock A on the vertical axis to 1000 shares of stock B on the horizontal axis. Now assume that you have to buy stocks A and B in equal quantities stocks A and B are perfect complements. This is not as absurd as it may seem. For example, if youre buying a house, you have to complements....
View Full Document

Ask a homework question - tutors are online