3. Consider a dynamic (two-period) representative firm's problem. This representativefirm is given K unit of capital to produce in the current period. Firm can choose(current-period and future-period) labor demands and investment (to adjust future-period's capital stock) to maximize its present-value lifetime profit. Given that themarket interest rate is r and the capital depreciation rate is & after production in eachperiod. Let's further assume that this firm sells all the capital after future-periodproduction.(a) Clearly definite the profit functions for both periods and write down this repre-sentative firm's problem.(b) Write down the optimal condition on investment. Intuitively explain the optimalcondition.(c) Suppose K increases, graph the change of investment curve. Intuitively explainthe changes on the graph you just drew.

The objective of the question is to define the profit functions for a representative firm over two…

Answered: 3. Consider a dynamic (two-period)…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

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3. Consider a dynamic (two-period) representative firm's problem. This representative firm is given K unit of capital to produce in the current period. Firm can choose (current-period and future-period) labor demands and investment (to adjust future- period's capital stock) to maximize its present-value lifetime profit. Given that the market interest rate is r and the capital depreciation rate is & after production in each period. Let's further assume that this firm sells all the capital after future-period production. (a) Clearly definite the profit functions for both periods and write down this repre- sentative firm's problem. (b) Write down the optimal condition on investment. Intuitively explain the optimal condition. (c) Suppose K increases, graph the change of investment curve. Intuitively explain the changes on the graph you just drew.

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