4. Suppose that there is a tax 7 on the sales of the firm, so that the firm only gets (1-7) times the quantity produced. The benefit of operating the capital stock for one period is now (1-7)-MPK. Use a variational argument as discussed in class to "derive" the new optimality condition of the firm which determines the target capital stock. Show graphically how an increase in the tax on capital will affect the optimal capital stock and hence investment.

4. Suppose that there is a tax 7 on the sales of the firm, so that the firm only gets (1-7) times the quantity produced. The benefit of operating the capital stock for one period is now (1-7)-MPK. Use a variational argument as discussed in class to "derive" the new optimality condition of the firm which determines the target capital stock. Show graphically how an increase in the tax on capital will affect the optimal capital stock and hence investment.

Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)

14th Edition

ISBN:9781305506381

Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Publisher:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Chapter5: Business And Economic Forecasting

Section: Chapter Questions

Problem 2E

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