Modern Principles: Microeconomics
4th Edition
ISBN: 9781319098766
Author: Tyler Cowen, Alex Tabarrok
Publisher: Worth Publishers
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Chapter 19, Problem 10TPS
Subpart (a):
To determine
Externalities in a public good and tragedy of commons.
Subpart (b):
To determine
Externalities in a public good and tragedy of commons.
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A firm faces the following production function,
Y = AKα L¹-a
(1)
Here Y is output, K is capital, L is fixed labour, and A is a measure of technology.
The firm uses an optimal amount of capital determined by the condition,
MPK = r +8
(2)
Where MPK is the marginal productivity of capital, r is the real interest rate, and ♪ is
the depreciation rate.
(a) Using equations (1) and (2) find an expression for K*, the optimal amount of
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[3 marks]
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each of the following variables change (holding other variables constant),
(i)
The measure of technology (A) falls
(ii)
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(iii)
The real interest rate (r) increases
[2 marks]
[2 marks]
[2 marks]
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K* if just the variable mentioned in the question part changes. Your answer should
state whether K* increases, decreases, or stays the…
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Chapter 19 Solutions
Modern Principles: Microeconomics
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