=+14.6 Business and Policy Application: Capital Gains Taxes: Taxes on capital gains are applied to income earned on investments that return a profit or “capital gain” and not on income derived from labor. To the extent that such capital gains taxes are taxes on the return on capital, they will impact the rental rate of capital in ways we will explore more fully in a later chapter. For now, we will simply investigate the impact of a capital-gains-tax-induced increase in the rental price of capital on firms within an industry.

A. Suppose you are running a gas station in a competitive market where all firms are identical. You employ weekly labor , and capital k using a homothetic decreasing returns to scale production function, and you incur a weekly fixed cost of F.