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Unformatted text preview: K = Y/K
1. Equals the slope of this production function.
2. Is always positive.
3. Declines as the amount of capital increases. K
39 310 low income countries have very little capital The Production Function: Output & Capital
• The Production Function: Output & Capital
MPK Two properties of this production function:
1. Exhibits increasing returns to capital.
• Slopes upward because more K produces more Y. 2. Exhibits diminishing marginal product of
capital.
• Slope becomes flatter because each additional
increment of K eventually produces smaller increments
of Y. MPK
K 311 economic profit continues to grow, but at some point,
it starts to slow down
as capital increases, the marginal product of k decreases 312 MPK is also the demand for capital 3 Determination of Capital Returns, rc Determination of Capital Returns, rc • Now, in equilibrium, the real cost of capital, rc,
will equal the marginal product of capital, i.e., K.supply rc, MPK B rc = MPK
– So the MPK is also the demand for capital, KD. A • Suppose the supply of capital, KS, is fixed, i.e., K0=MPK KS = K K
313 314 the rental cost of capital is determined by the value of the
equipment
point A is EQB
as the rental cost rises the demand for capital till decrease.
so you have an excess amount of capital
so then the price falls The Production Function: Output & Capital
• If either L0 or A0 changes, what happens to: The Production Function: Output & Capital
Y 1. The production function, B rc, MPK AY = A F(K, L ) Y0 0 0 2. Economic output,
3. The marginal product of capital, and
4. The real (rental) cost of capital?
rc0 K
315 K MPK K K
316 L goes up => Y goes up => rotate production function up.
meaning the slope of the production function should be steeper at
point B than at pt A
rental rate goes up also, since the MPK shifts up
everything increases 4 The Production Function: Output & Capital The Production Function: Output & Labor • • Factors that shift the demand for ca...
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This note was uploaded on 11/07/2012 for the course ECON 100B taught by Professor Wood during the Spring '08 term at University of California, Berkeley.
 Spring '08
 Wood
 Macroeconomics

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