Consider the production Y = AK13 L2/3 where Y is output, A is TFP, K is the stock of capital, and L is the quantity of labor. The real interest rate R is equal to the marginal productivity of capital. R= A(+) %3D What happens to the real interest rate if the stock of capital is divided by two, keeping population and TFP constant? Does it increase/decrease by a factor or more/lessiexactly two? Explain.

ENGR.ECONOMIC ANALYSIS
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Author:NEWNAN
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Chapter1: Making Economics Decisions
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Consider the production
Y = AK3 L2/3
%3!
where Y is output, A is TFP, K is the stock of capital, and L is the quantity of labor.
The real interest rate R is equal to the marginal productivity of capital.
R = A(+)
What happens to the real interest rate if the stock of capital is divided by two, keeping population and TFP
constant? Does it increase/decrease by a factor or more/less/exactly two? Explain.
Transcribed Image Text:Consider the production Y = AK3 L2/3 %3! where Y is output, A is TFP, K is the stock of capital, and L is the quantity of labor. The real interest rate R is equal to the marginal productivity of capital. R = A(+) What happens to the real interest rate if the stock of capital is divided by two, keeping population and TFP constant? Does it increase/decrease by a factor or more/less/exactly two? Explain.
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