Suppose that firms produce according to the production function Y = AK1/2L1/2, where A = 5 andL = 400. Assume that the prices of capital and output are equal and that the real interest rate, r, isequal to 0.25 and the depreciation rate, δ, is equal to 0.1.1. If firms operate according to the neoclassical theory of investment, what is the optimal levelof capital stock, K (YP) to rich (YR).22. Suppose that the government offers an investment tax credit which changes the relative priceof capital. This results in Pk = 3 and P = 6. What is the new optimal level of capital stock,K??3. Does the investment tax credit have an expansionary impact on the economy? Explain whyor why not.4. Based on the optimal capital stock computed in part (2), what is the level of investmentneeded to sustain this level of capital stock? Suppose that firms produce according to the production function Y = AK'/²L'/2, where A = 5 andL= 400. Assume that the prices of capital and output are equal and that the real interest rate, r, isequal to 0.25 and the depreciation rate, 8, is equal to 0.1.1. If firms operate according to the neoclassical theory of investment, what is the optimal levelof capital stock, K*?2. Suppose that the government offers an investment tax credit which changes the relative priceof capital. This results in P = 3 and P= 6. What is the new optimal level of capital stock,K*?3. Does the investment tax credit have an expansionary impact on the economy? Explain whyor why not.4. Based on the optimal capital stock computed in part (2), what is the level of investmentneeded to sustain this level of capital stock?

The neoclassical theory proposes that the company's degree of investment ought to rely just upon its…

Answered: Suppose that firms produce according to…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Suppose that firms produce according to the production function Y = AK1/2L
1/2
, where A = 5 and
L = 400. Assume that the prices of capital and output are equal and that the real interest rate, r, is
equal to 0.25 and the depreciation rate, δ, is equal to 0.1.
1. If firms operate according to the neoclassical theory of investment, what is the optimal level
of capital stock, K
(Y
P
) to rich (Y
R
).
2
2. Suppose that the government offers an investment tax credit which changes the relative price
of capital. This results in Pk = 3 and P = 6. What is the new optimal level of capital stock,
K
?
?
3. Does the investment tax credit have an expansionary impact on the economy? Explain why
or why not.
4. Based on the optimal capital stock computed in part (2), what is the level of investment
needed to sustain this level of capital stock?

Suppose that firms produce according to the production function Y = AK'/²L'/2, where A = 5 and
L= 400. Assume that the prices of capital and output are equal and that the real interest rate, r, is
equal to 0.25 and the depreciation rate, 8, is equal to 0.1.
1. If firms operate according to the neoclassical theory of investment, what is the optimal level
of capital stock, K*?
2. Suppose that the government offers an investment tax credit which changes the relative price
of capital. This results in P = 3 and P= 6. What is the new optimal level of capital stock,
K*?
3. Does the investment tax credit have an expansionary impact on the economy? Explain why
or why not.
4. Based on the optimal capital stock computed in part (2), what is the level of investment
needed to sustain this level of capital stock?

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