7 Optimal level of capital Assume a Cobb Douglas function with a = 0.5, A = 1 and L = 10. Create table with capital going from 0 to 10, and then calculate the output and the marginal product of capital in the two ways we did it in class (as the difference in product and with the derivative formula). Then, use this table to answer the following questions: 1. Is the marginal product of capital decreasing or increasing? 2. If the firm is maximizing profits, what condition should be satisfied? 3. If the interest rate is equal to 0.6, according to this table, what is the optimal level of capital. 4. Assume that the productivity drops to 0.9. Do you expect that the optimal level of capital increases or decreases? Explain your answer.

7 Optimal level of capital Assume a Cobb Douglas function with a = 0.5, A = 1 and L = 10. Create table with capital going from 0 to 10, and then calculate the output and the marginal product of capital in the two ways we did it in class (as the difference in product and with the derivative formula). Then, use this table to answer the following questions: 1. Is the marginal product of capital decreasing or increasing? 2. If the firm is maximizing profits, what condition should be satisfied? 3. If the interest rate is equal to 0.6, according to this table, what is the optimal level of capital. 4. Assume that the productivity drops to 0.9. Do you expect that the optimal level of capital increases or decreases? Explain your answer.

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter17: Capital And Time

Section: Chapter Questions

Problem 17.2P

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