Reference no: EM132405832
1. Assume that a firm has future marginal productivity of capital given by MPK = A(100-K). The price of capital (machine) is $20,000, the real interest rate is 10%, and capital depreciates at a 10% rate. Assume further that each unit of output sells for $50.
A) Calculate the user cost of the capital (in real term) that the firm faces.
B) Assume A=1, then calculate the desired capital stock. What is the firm's gross investment if the firm currently has 10 machines? (Assume the machines depreciate at the same rate as the usual rate above.)
C) If the TFP increases to 2, i.e. A=2, then what is the gross investment (still assume the firm currently has 10 machines)?
2. A consumer is making lifecycle consumption plans for two periods (this year and next year). The consumer's current realincome after taxes is $100,000. She knows that her real income after taxes will be $121,000 in next year. She can borrow and lend freely at an annual real interest rate of 10%. Currently, the consumer has no wealth (no money in the bank or other financial assets, and no debts).
A) If the consumer wants to consume the same amount of consumption this year and next year, then how much should she consume each period?
B) If the consumer wants to consume next year twice as much as the consumption of this year, then how much should she consume each period? Does she borrow or save this year? [hint: if this year consumption is x, the next year consumption is 2x.]
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