Problem 1AAccording to the new classical investment model we have:PMPK =* (r + 8)(1)Derive the above cquation and explain it briefly.Suppose that a firm has a production function ofY = AKOSL 05i.ii.where Y is output, A is productivity (or technology), K is capital and L islabour. When A = 2, K = 100 and L = 400. Obtain the marginal product ofсapital (MPK).Consider a production function that Y = AK²L², where A = 0.1, L = 1, Px =1,P= 1,r=0.1, and 8=0.1. What is the optimal level of capital, K*, in the steadystate?Problem 1B Total Investment equation is given by:I = AK + 6K = 4 [MPK –4(+ + 8)] + &K,(2)PNext, draw a downward-sloping investment function where the vertical axis islabeled with r and the horizontal axis is labeled with investment, I. Call it Figure1.Assume that the rate of interest rate is ri and investment is I1. What will happento the investment if interest rate decreases? Explain it using Figure 1.What will happen to the investment if technology improves due to some newinventions. Explain it using Figure 1.ii.

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Problem 1A| According to the new classical investment model we have: MPK =(r + 8) (1) i. Derive the above equation and explain it briefly. Suppose that a firm has a production function of Y= AK®$L 05 ii. where Y is output, A is productivity (or technology), K is capital and L is labour. When A = 2, K= 100 and L= 400. Obtain the marginal product of саpital (MPK). Consider a production function that Y = AK²L², where A = 0.1, L= 1, Px =1, P=1,r=0.1, and &=0.1. What is the optimal level of capital, K*, in the steady iII. state?

Problem 1A| According to the new classical investment model we have: MPK =(r + 8) (1) i. Derive the above equation and explain it briefly. Suppose that a firm has a production function of Y= AK®$L 05 ii. where Y is output, A is productivity (or technology), K is capital and L is labour. When A = 2, K= 100 and L= 400. Obtain the marginal product of саpital (MPK). Consider a production function that Y = AK²L², where A = 0.1, L= 1, Px =1, P=1,r=0.1, and &=0.1. What is the optimal level of capital, K*, in the steady iII. state?

ENGR.ECONOMIC ANALYSIS

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Chapter1: Making Economics Decisions

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Question

Problem 1A
According to the new classical investment model we have:
P
MPK =* (r + 8)
(1)
Derive the above cquation and explain it briefly.
Suppose that a firm has a production function of
Y = AKOSL 05
i.
ii.
where Y is output, A is productivity (or technology), K is capital and L is
labour. When A = 2, K = 100 and L = 400. Obtain the marginal product of
сapital (MPK).
Consider a production function that Y = AK²L², where A = 0.1, L = 1, Px =1,
P= 1,r=0.1, and 8=0.1. What is the optimal level of capital, K*, in the steady
state?
Problem 1B Total Investment equation is given by:
I = AK + 6K = 4 [MPK –4(+ + 8)] + &K,
(2)
P
Next, draw a downward-sloping investment function where the vertical axis is
labeled with r and the horizontal axis is labeled with investment, I. Call it Figure
1.
Assume that the rate of interest rate is ri and investment is I1. What will happen
to the investment if interest rate decreases? Explain it using Figure 1.
What will happen to the investment if technology improves due to some new
inventions. Explain it using Figure 1.
ii.

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