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Investment is more than depreciation

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1. Let Kt denote the market value of capital stock of a firm at the beginning of year t. Assume λ is the rate of firm's capital depreciation each year. Further assume that the firm makes I dollar of new capital expenditure or investment each year.

2. (a) Write the first order difference equation relating the capital stock of the firm at the beginning of the year Kt +1 to the capital stock and investment in year t

(b) Solve the equation. What would happen to the firm's capital stock if

(I) Investment is more than depreciation?

(II) Investment is only for replacement of the depreciated stock?

(III) Investment is less than depreciation?

Reference no: EM13876843

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