Q3. A) If the supply price of machine is Rs. 3000 and Marginal productivity of capital is 10% , the estimated return from the capital asset are Rs. 1100 and Rs. 2420 respectively in the first and second year. Prove that prospective income and supply price of an asset are equal. B) What is Marginal Efficiency of Capital? What are the determinants of Marginal Efficiency of capital?

Q3. A) If the supply price of machine is Rs. 3000 and Marginal productivity of capital is 10% , the estimated return from the capital asset are Rs. 1100 and Rs. 2420 respectively in the first and second year. Prove that prospective income and supply price of an asset are equal. B) What is Marginal Efficiency of Capital? What are the determinants of Marginal Efficiency of capital?

Microeconomics: Private and Public Choice (MindTap Course List)

16th Edition

ISBN:9781305506893

Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Publisher:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Chapter10: Price-searcher Markets With Low Entry Barriers

Section: Chapter Questions

Problem 10CQ

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As an example of a company that did not ignore its cost of capital, consider Coca-Cola in the 1980’s. It had very little debt because it preferred to raise equity capital from its stockholders. It also had a diversified product line, including products like aquaculture and wine. But none of these activities earned as much as its soft drink division. The opportunity cost of investing in these unrelated businesses was the forgone opportunity to expand the soft drink division, which at the time was earning a 16 percent return on capital. Although, these other businesses were earning a positive 10 percent rate of return on capital, the opportunity cost of that capital was 16 percent. CEO Robert Goizueta correctly decided to sell off these under-performing divisions and invest the capital in its soft drink division. By making decisions whose benefits were greater than their costs, the topic of this chapter, Coca-Cola increased its profitability.
Suppose that the XYZ Corp. (which is a profit-maximizing enterprise) produces “gadgets” according to the following production function: Q = 300K + 100KL + 2000L - L^2 , where Q is the number of gadgets per year, K is the amount of capital (machines) that are used, and L is the number of workers employed per year. Gadgets sell for $100 each. a) If XYZ has 10 machines, and workers cost $100,000/year (including benefits and direct ancillary expenses), how many workers should XYZ hire? b) If the workers cost $120,000, how many workers should XYZ hire? c) If workers cost $100,000 but gadgets sell for $80 each, how many workers should XYZ hire? d) If XYZ instead has 20 machines, how many workers should it hire when workers cost $100,000 and gadgets sell for $100?
ll of the following will cause a shift in the demand curve for capital EXCEPT: A change in sales expectations. the interest rate. changes in labor prices. technological change.
Consider the problem of a firm who produces output in the present and the future period. This firm is endowed with K units of capital in the current period which is exogenously given. The firm can, however, choose future capital stock K′ through investment I. In particular, we have the following capital accumulation equation: K′ =(1−d)K+I. The firm’s profit is π = Y − wN − I in the current period, where Y = zF(K,N) is output, w is wage, and N is employed labour. Similarly, the profit in the future period is given by π′ =Y′−w′N′+(1−d)K′,whereY′ =z′F(K′,N′)is future output,w′ is future wage, N′ is future labour demand, and (1 − d)K′ is the value of capital left over after production in the future period. The firm maximizes the present value of profits given by V=π+(π'/1+r) Answer the following questions. Write down the firm’s profit maximization problem. Derive labour demands for both the current period and the future period. Suppose the production function is given byY…
If the marginal personal tax rate imposed on interest income paid to bondholders were to increase, holding the corporate tax rate and the personal tax rate on payments to equity (e.g., taxes on dividends), what is the impact on the marginal benefit of debt to the corporation? How might this effect the optimal amount of debt the firm should have in its capital structure?
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Let us assume that four plots of land is currently used for agriculture which are denoted as A,B,C and D where A is the most productive land while D is the least productive land (marginal land). Suppose that the profit rate of land D is 10%. a) What the investors of that country are expected to do in that case if the profit rate in industry is 12% according to Ricardo? Will the D continue to be the marginal land in that case? b) What the investors of that country are expected to do in that case if the profit rate of industry is 8%? Do this lead to a change in what will be the marginal land in that case?
2. A firm learns of an investment opportunity that will increase future revenue, two years from now, by $121 million. The marginal resource cost of the physical capital today is $100 million dollars. Should this firm make this investment at an interest rate of 10%? Why?
What is meant by diminishing returns to capital? Use a hypothetical example to support your answer.
What are the two components of the user cost of capital? What is a capital good for both of the componenets?
Question 2 Lamya has initial investment of SR45, 000. If it were to be invested on stocks, the market interest rate would be 0.12 (12%).However, the industry uses capital and labor as inputs and sells 2, 800 belts per month at SR25 market price. If the cost of the machine that produces the belts is SR 30,000 and labor cost is 20,000. Calculate the following: a. Total revenue. b. Opportunity cost of capital c. Economic profit d. Accounting profit e. From your answer in (c), is the business profitable from the economic profit point of view? Explain your answer. Question 3 The table below gives some data on the population of Crescent Highland. Use the provided information to fill the table. YEARS 1 2 3 4 5 6 7 Population: 16 Years Older or Over (Millions) LabourForce (Millions) Employed (Millions) Unemployed (Millions)…