Consider a firm that borrows to invest in production of capital goods. Let's say theproduction function is given by:Y = 2AK/2where, K is physical capital borrowed and A is 'technology'. From what we havelearnt, the 'real' profit function of this firm would be given as II = Y - (r+ 8) K, wherer and ô respectively represents the real interest rate and depreciation rate on capital.Given this:a) Find the firm's optimal demand for capital K".b) Given the optimal demand for capital what is firm's profit II'?c) Given your answer to part a) above, explain intuitively the observed relationshipbetween K and A, r and 8?

Given: The production function is given by:Y = 2AK1/2 K is = Capital A is = Technology The profit…

Consider a firm that borrows to invest in production of capital goods. Let's say the production function is given by: Y = 2AK/2 where, K is physical capital borrowed and A is 'technology'. From what we have learnt, the 'real' profit function of this firm would be given as II = Y-(r+ 8) K, where r and 8 respectively represents the real interest rate and depreciation rate on capital. Given this: a) Find the firm's optimal demand for capital K". b) Given the optimal demand for capital what is firm's profit II'? c) Given your answer to part a) above, explain intuitively the observed relationship between K" and A, r and 8?

Consider a firm that borrows to invest in production of capital goods. Let's say the production function is given by: Y = 2AK/2 where, K is physical capital borrowed and A is 'technology'. From what we have learnt, the 'real' profit function of this firm would be given as II = Y-(r+ 8) K, where r and 8 respectively represents the real interest rate and depreciation rate on capital. Given this: a) Find the firm's optimal demand for capital K". b) Given the optimal demand for capital what is firm's profit II'? c) Given your answer to part a) above, explain intuitively the observed relationship between K" and A, r and 8?

Microeconomics: Principles & Policy

14th Edition

ISBN:9781337794992

Author:William J. Baumol, Alan S. Blinder, John L. Solow

Publisher:William J. Baumol, Alan S. Blinder, John L. Solow

Chapter18: Pricing The Factors Of Production

Section: Chapter Questions

Problem 2TY

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