# Lecture08 - Announcements Readings for today Review House...

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1 Announcements Readings for today. Review • House, ch 6, 7, 8 • Mankiw, ch 3, 18 Problem sets • No PS this week • Practice midterm answers posted today 1 K K t tt K t p MPK p r p d + æö D ÷ ç ÷ »+ - ç ÷ ç ÷ ç èø - increase in va return to capita lue of capital l = interest cost + depreciation = "rental rate" or "user cost" = uc Intuition: If capital goods getting more valuable over time, can sell capital next period at a gain to offset r d + Review 1 K K t K t p MPK p r p d + D ÷ ç ÷ - ç ÷ ç ÷ ç [] 11 1 Demand for capital user cost K K t K t p KM P Kp r M P K p d -- + éù D ÷ ç êú ÷ =+ - = ç ÷ ç ÷ ç ëû

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2 E.g., Cobb-Douglas () tt FK AK a = 1 MPK F K AK a a - ¢ == 1 1 =user cost K K t K t p AK p r p a ad - + æö D ÷ ç ÷ =+ - ç ÷ ç ÷ ç èø 1 1 1 K K t t K t t p pr p K A a d a - - + D ÷ ç÷ ç ÷ ÷ ç +- ç ÷ ÷ ç ç ÷ ÷ ç ç ÷ ç ÷ = ç ÷ ç ÷ ÷ ç ÷ ç ÷ ç ÷ ç ÷ ç Note: Correction of typo in exponent Elasticity of demand for capital wrt user cost is negative 11 1 1 31 2 a a = - = - - 1 uc Demand for capital depends on the user cost ( uc) MPK K 1 K 1 uc Demand for capital depends on the user cost ( uc) MPK K 1 K 2 uc 2 K Dimimishing : Lower Higher MPK uc K
3 From demand for capital to investment 1 Capital accumulation identity (1 ) tt t IK K d - =-- 1 1 1 1 () ( 1) ( 1 ) t K K t K t IM P K u c K p Kp r K p d dd - - + - =- - æö D ÷ ç ÷ =+ -- - ç ÷ ç ÷ ç èø 1 Investment function (, ) t II r K - = Revisiting Investment-Saving Equilibrium

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## This note was uploaded on 12/31/2011 for the course ECON 402 taught by Professor House during the Fall '08 term at University of Michigan.

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Lecture08 - Announcements Readings for today Review House...

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