ECO204_2008_Test_2_solutions

33 60000 30000 12333333 for the next 10 years

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Unformatted text preview: : User cost of capital = Depreciation + Opportunity cost. Opportunity cost is zero for all years and depreciation is $123,333.33 for the first 5 years and $33,333 thereafter. Hence: Table 2 Year PK 1 123,333.33 2 123,333.33 3 123,333.33 4 123,333.33 5 123,333.33 6 33,333 7 33,333 8 33,333 9 33,333 10 33,333 11 33,333 12 33,333 13 33,333 14 33,333 15 33,333 Note: If you assumed and stated that the Handle Mold and Packaging machines were again purchased at the end of their depreciation time, you will be given credit. (e) (5 points) Assuming wages and the target output of toothbrushes are constant, calculate Colgate's optimal labor and capital usage over time. Explain your answer using algebra and/or graphs. Answer: Colgate uses a fixed proportions technology with labor and capital in a 1:1 ratio. Thus, it has a complements production function. The price of labor is constant while the price of capital is falling over time. This has no change in the amounts of labor or capital because with a complements technolog...
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