Question

what are the two components of user cost of capital? what is the desired capital stock? how does it depend on expected future marginal product of capital?

Answer 1

The interest cost and the depreciation cost are the two components of the user cost of capital. The interest cost is the opportunity cost of not investing in any of the productive activities and keeping in the bank as deposits while the depreciation cost is the value lost because of wear and tear during the production period.

It is the amount of capital required for a firm to earn the maximum possible profit.

The amount of desired capital is directly related with marginal product of capital. The higher the amount of desired capital stock the higher the expected future marginal product of capital, as it would be more productive in the future.