Econ 100B Section 5 Answers

The demand for capital depends on the marginal

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Unformatted text preview: ket: • The production function between output and capital shows how economic output, Y, depends on the size of the capital stock, K, for a given labor force, L0, and for a given level of technology, A0. Diagram: RK, MPK Y0 Y1 Y0 = A F(K,L0) R0 Y1 = A F(K,L1) MPK0 R1 MPK1 K K K 1 K SPRING 2014 ECONOMICS 100B GSI: KRISTYN ABHOLD b. Equilibrium in the capital market: i. The demand for capital depends on the marginal product of capital MPK = , which: 1. equals the slope of the production function 2. is always positive 3. declines as the amount of capital increases (diminishing marginal product) ii. Factors that shift the demand for capital curve: 1. Changes in the labor force, ΔL. 2. Supply (or technology) shocks, ΔA. a. Remember, a...
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