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

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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, I’ll use method #2 in this analysis because my goal is to eventually describe the taxation of land and capital. Ƈ Ƈ Ƈ 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 you’re buying a house, you have to complements....
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