Question

The equation for the marginal productivity of capital is given​ by: MPKf ​=​1,000−10K The price of...

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​ =

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Homework Answers

Answer #1

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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