Question: You have just lectured two tax free institutions on the necessity

You have just lectured two tax-free institutions on the necessity of including taxes in the general equilibrium relationship. One believed you and one did not. Demonstrate that if the model holds, the one that did could engage in risk-free arbitrage with the one that did not in a manner such that:
-Both parties believed they were making an arbitrage profit in the transaction.
-The one who believed in the post tax model actually made a profit; the other institution incurred a loss.

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  • CreatedJune 10, 2015
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