Economics 100B Lecture 6 - Economics 100B Professor Wood...

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Economics 100B Professor Wood 2/7/08 Lecture 6 ASUC Lecture Notes Online is the only authorized note-taking service at UC Berkeley. Please do not share, copy or illegally distribute these notes. Our non-profit, student-run program depends on your individual subscription for its continued existence. These notes are copyrighted by the University of California and are for your personal use only. Sharing or copying these notes is illegal and could end note taking for this course Lecture 6. News/Remarks 1. Problem sets are due on Tuesday at the beginning of class. 2. Questions that have come up: a. On the Multiple Choice questions, all you have to do is circle the answer corresponding to the correct answer. b. Two longer questions require diagrams: Draw diagrams, and write equations, but the rest of your answer should be word processed. Color distinction among curves is appreciated. Graphs can be done on computer if desired. Last time: 1. Variables determining desired savings. 2. What determines desired investment? Determining the Desired Capital Stock 1. User cost of capital is independent of the amount of capital. Thus it can be represented as a horizontal line on the graph modeling K on the horizontal axis and MRK f and UC on the vertical. (See Lecture Diagrams). 2. The marginal product of capital (future) will, however, decline with an increase in the K (capital stock). 3. In equilibrium, the intersection of these two lines will determine the desired K* Investment 1. Changes in the desired capital stock a. Any factor that changes the user cost of capital will also cause a change in the desired capital stock. i. Eg. Interest rates (see last lecture for more on this). b. If UC rises, the desired K* falls c. Any factor that will shift the MRK f curve will also cause a change in the desired capital stock: i. Better Technology 1. Positive change in the MPK ii. The labor force 1. Also will cause an increase in the MPK iii. If MPK shifts 1. There is a greater benefit than cost of additional capital, more will be added (in the event of a positive shift), and a new equilibrium will be achieved at the new intersection. d. Taxes i. Imposed on individuals and businesses ii. With taxes the return to capital is (1- τ )MPK f 1. (1- τ )MPK f =UC will solve for new equilibrium. iii. Tax adjusted user cost of capital is UC/(1- τ ) 1. For determinants of UC, see last lecture.
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ASUC Lecture Notes Online Economics 100B 2/7/08 Sharing or copying these notes is illegal and could end note taking for this course 2 2. Insert into equation for UC, and one can solve for MPK f iv. An increase in τ raises the tax adjusted user cost of capital and reduces the desired capital stock. e.
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This note was uploaded on 02/15/2008 for the course ECON 100B taught by Professor Wood during the Spring '08 term at University of California, Berkeley.

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Economics 100B Lecture 6 - Economics 100B Professor Wood...

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