Suppose your company is in equilibrium,with its capital stock at its desired level.A permanent increase in the tax rate on your firm's revenues now has what effect on your desired capital stock?
A)raises it,because the future marginal productivity of capital is higher
B)lowers it,because the future marginal productivity of capital is lower
C)raises it,because the after-tax user cost of capital is now lower
D)lowers it,because the after-tax user cost of capital is now higher

Question

Quizplus · Accepted Answer

A permanent increase in the tax rate on the firm's revenues will increase the after-tax user cost of capital, which in turn will lower the desired capital stock. This is because the after-tax return on each additional unit of capital will be lower, making it less attractive to invest in more capital. Therefore, the firm will reduce its desired capital stock.

Suppose Your Company Is in Equilibrium,with Its Capital Stock at Its