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Consider two countries A and B. In both countries firms’ net revenue \\(Pr\\) is equal to the difference between income and the cost of borrowing, as described by the following equation:
\\(Pr = y – ik\\)
where \\(y\\) denotes real income, \\(i\\) is the nominal interest rate, and \\(k\\) is capital borrowed by firms to finance production.

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In both countries a corporate income tax is levied at the rate \\(\\tau\\) on firms’ real income. However, the government in country A allows firms to deduct nominal interest payments from this income before taxing it whereas the government in country B allows firms to deduct only real interest payments on borrowing.

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Calculate the after-tax net revenue in both countries:

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\\(P_{rA}\\) = [[0]]

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\\(P_{rB}\\) = [[1]]

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EC2065 activity 4.5

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