Suppose that the production function of a firm is given by Y = AK/2L'/2, where A = 1 and L = 100. Suppose further that the price of the capital good (P) is 5, the price of the final output good (P) is 2, and the real interest rate is 0.1, and the depreciation rate is 0.1. 1. What is the replacement cost of the installed capital? 2. Suppose currently we have K = 64. Calculate the market value of the installed capital (as- sume that both A and L remain at the current values in the future). What is the value of Tobin's q? Should the firm increase or decrease its capital stock? 3. What is the optimal level of capital? What is the value of Tobin's q under the optimal level of capital? 4. Suppose that there has been a large inflow of migration, so L jumped to 144. What is the new optimal level of capita?
Suppose that the production function of a firm is given by Y = AK/2L'/2, where A = 1 and L = 100. Suppose further that the price of the capital good (P) is 5, the price of the final output good (P) is 2, and the real interest rate is 0.1, and the depreciation rate is 0.1. 1. What is the replacement cost of the installed capital? 2. Suppose currently we have K = 64. Calculate the market value of the installed capital (as- sume that both A and L remain at the current values in the future). What is the value of Tobin's q? Should the firm increase or decrease its capital stock? 3. What is the optimal level of capital? What is the value of Tobin's q under the optimal level of capital? 4. Suppose that there has been a large inflow of migration, so L jumped to 144. What is the new optimal level of capita?
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
Related questions
Question
100%
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 3 steps with 3 images
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.Recommended textbooks for you
Principles of Economics (12th Edition)
Economics
ISBN:
9780134078779
Author:
Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:
PEARSON
Engineering Economy (17th Edition)
Economics
ISBN:
9780134870069
Author:
William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:
PEARSON
Principles of Economics (12th Edition)
Economics
ISBN:
9780134078779
Author:
Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:
PEARSON
Engineering Economy (17th Edition)
Economics
ISBN:
9780134870069
Author:
William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:
PEARSON
Principles of Economics (MindTap Course List)
Economics
ISBN:
9781305585126
Author:
N. Gregory Mankiw
Publisher:
Cengage Learning
Managerial Economics: A Problem Solving Approach
Economics
ISBN:
9781337106665
Author:
Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:
Cengage Learning
Managerial Economics & Business Strategy (Mcgraw-…
Economics
ISBN:
9781259290619
Author:
Michael Baye, Jeff Prince
Publisher:
McGraw-Hill Education