microbook_3e-page100 - If the government imposes a 50% tax...

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If the government imposes a 50% tax on the return on the return to stock B – via method #2: the effective price of stock B rises from $1 to $2 (effectively, a $1 tax per share) – then your isocost line would rotate inward in a clockwise direction. Since you have to purchase stocks A and B in equal quantities: x you would now buy 333 shares of stock A and 333 shares of stock B x your 5% return on stock A would give you $16.67 and x your 10% return on stock B would give you $33.33. So your new isoquant is drawn for a $50 return. ƇƇƇ the substitution effect – the case of perfect complements In the case of an individual’s consumption of two goods, the pure substitution effect contains a change in relative price, but compensates the consumer for the relative price change by enabling him to consume the same initial bundle of goods. That is: there is a relative price change, but the consumer’s initial real income (purchasing power) is left unchanged. To draw the pure substitution effect for the case of stocks A and B, we’ll rotate the isocost line through
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This note was uploaded on 12/29/2011 for the course ECO 311 taught by Professor Willis during the Fall '10 term at SUNY Stony Brook.

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