Consider the following Cobb-Douglas production function: Y AL K¹-0 where 0 = 0.25 Assuming settings of Neo-Classical theory of investment derive the following: a. Function representing the current value of desired stock of capital. b. Current value of desired stock of capital when output is 5 billion $ while rental cost is 0.12. c. Now suppose output is expected to rise to 7 billion $, find corresponding value in desired stock of capital?

Consider the following Cobb-Douglas production function: Y AL K¹-0 where 0 = 0.25 Assuming settings of Neo-Classical theory of investment derive the following: a. Function representing the current value of desired stock of capital. b. Current value of desired stock of capital when output is 5 billion $ while rental cost is 0.12. c. Now suppose output is expected to rise to 7 billion $, find corresponding value in desired stock of capital?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

Q3. Consider the following Cobb-Douglas production function:
Y = AL K1-0 where 0 = 0.25
Assuming settings of Neo-Classical theory of investment derive the following:
a. Function representing the current value of desired stock of capital.
b. Current value of desired stock of capital when output is 5 billion $ while rental cost
is 0.12.
c. Now suppose output is expected to rise to 7 billion $, find corresponding value in
desired stock of capital?
d. How would you define value of investment in the given context of discussion?

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Step 1: Define a production function

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Step 2: Derive the function representing the current value of desired stock of capital.

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Step 3: Calculate the capital stock when output is $5 billion and rental cost is 0.12

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Step 4: Calculate the capital stock when output is $7 billion and rental cost is 0.12

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