Assume Canada is a small, open economy such that the supply of capital is perfectly elastic at a net rate of return equal to 10 percent. Suppose the demand for capital in Canada is a downward sloping function of the net-of-tax rate of return rt . Depict the equilibrium quantity of capital in Canada and the user cost of capital net of economic depreciation (C - δ ) in the case where
a. There is no corporate taxation in Canada.
b. There is a corporate tax in Canada and the marginal investment is financed by the equity.
c. There is a corporate tax in Canada and the marginal investment is financed by debt.