The equation for the marginal productivity of capital is given by:
MPKf =1,000−10K
The price of a unit of capital is 2,000. The rate of depreciation is: 5% per year. The real interest rate is: 7% per year.
1. What is the user cost of capital? uc =
2. What is the desired capital stock? K* =
3. If the existing level of capital Kt is equal to 40 units, what is the level of gross investment?
It =
Explanation:-
The marginal Productivity of capital is:
MPk = 1000 – 10K
The price of capital : Pk = 2000
The rate of depreciation = 5% per year
The real interest rate = 7% per year
User cost of capital(uc):
= (5% + 7%) * 2000
uc = 240
User cost of capital is 240
Desired capital stock:
It is obtained by equating user cost of capital to MPk
So, MPk = User cost of capital
1000 – 10K* = 240
K* = 76
Desired capital stock is 76
The existing level of capital stock is Kt = 40 units
So, the level of gross Investment : It = K* - Kt = 76 – 40 = 36
So gross Investment is 36 units
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