Investment and Goods Market Equilibrium

Investment and Goods Market Equilibrium - Lecture #7...

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Econ 1110, Spring 2008, Professor Te 1 Lecture #7 Investment and Goods Market Equilibrium
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Econ 1110, Spring 2008, Professor Te 2 User Cost of Capital: An Example Relevant Information About Machine • Current price of new machine: p K = $100 Price of one-year-old machine next year = $85 Interest rate, r = 8% per year Cost of Using Machine for One Year Depreciation: $100 – $85 = $15 per unit of capital per year Depreciation rate, say, d = 15% per year Interest cost: 8% of $100 = $8 per unit of capital per year Total Cost = $23 per unit of capital per year • General Formula: uc = ( r + d ) p K
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Econ 1110, Spring 2008, Professor Te 3 B C A The Desired Capital Stock K 1 * uc MPK f Capital Stock, K f MPK f and uc MPK f = uc K 0
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Econ 1110, Spring 2008, Professor Te 4 Linking Investment to Desired Capital Stock I t = K* (1 d ) K t Lags and Investment
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Econ 1110, Spring 2008, Professor Te 5 uc 2 uc 1 MPK f E F Effect of Decrease in User Cost of Capital K 2 * K 1 * Capital Stock, K f MPK f and uc
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Econ 1110, Spring 2008, Professor Te 6 F E Effect of Increase in MPK f K 2 * K 1 * uc MPK f Capital Stock, K f MPK f and uc
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This note was uploaded on 04/15/2008 for the course ECON 1110 taught by Professor Tedloch-temzelides during the Spring '08 term at Pittsburgh.

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Investment and Goods Market Equilibrium - Lecture #7...

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