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Unformatted text preview: ECON 714: MACROECONOMIC THEORY II TA: TIM LEE FEBRUARY 19, 2010 Capital Adjustment with Fixed Cost Consider the following problem of an infitely-lived firm under uncertainty. The firm wants to maximize the expected discounted value of its profit stream, with future profits being discounted at a constant gross interest rate R . At time t , the firms profit net of user costs of capital is given by ( k t , t ) , where t is the productivity shock and k t is the capital stock. is strictly concave in k . Further assume that t follows a Markov process. At the beginning of each period, the firms productivity shock is realized. After ob- serving the shock, the firm decides whether to adjust its capital stock or not. If the firm decides not to adjust its capital, then the capital remains at the same level as in the previ- ous period - no depreciation. If the firm decides to adjust its capital stock, then it pays a fixed cost f ( t ) and chooses a new level of capital for todays production. Note that theand chooses a new level of capital for todays production....
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- Spring '08