the net marginal product of capital is equal to the real interest rate because

The net marginal product of capital is equal to the

This preview shows page 11 - 14 out of 25 pages.

the net marginal product of capital is equal to the real interest rate because this would imply that the consumer was receiving a lower rate of return on his or her saving than could be obtained by lending the credit market at the real interest rate r . Thus the real interest rate represents the opportunity cost of investing for the representative firm.
Image of page 11

Subscribe to view the full document.

The Optimal Investment Schedule for the Representative Firm This figure shows the optimal investment schedule for the representative firm. The optimal representative rule states that the firm invests MP k – d = r . The future net marginal product schedule MP k – d = r is the representative firms optimal investment schedule, because this describes how much investment is required for the net marginal product of future capital to equal the real interest rate. It can be seen that the optimal investment schedule is the firm’s net marginal product of capital, as a function of investment, given then initial quantity of capital K. If the firm’s real interest rate is r 1 ten the firm wishes to invest I 1 . The optimal investment schedule shifts to right if the future total factor productivity, z’, increases. If total factor productivity is expected to be higher in the future so that z’ increases, this increases the future marginal product of capital, and the firm is more willing to invest during the current period. Higher investment in the current period leads to higher future productive capacity, so that the firm can take advantage of high future total factor productivity. The optimal investment schedule shifts to left if the current capital stock K is higher. A higher capital stock at the beginning of the current period implies that for a given level of current investment I, the future capital stock K’ will be larger. That is, if K is larger, then there is more of this initial capital left after the depreciation in the current period to use in future production.
Image of page 12
Therefore, higher K implies that the future marginal product of capital, MP’ K , will decrease for each level of investment, and the optimal investment will then shift to the left. The Optimal Investment Schedule Shifts to the Right if Current Capital Decreases of Future Total Fcator Productivity is Expected to Increase This figure shows that the optimal investment schedule shifts to the right if current capital decreases or future total factor productivity is expected to increase. This is because either of these changes causes the future marginal product of capital to increase. From the figure we can see a shift to the right in the optimal investment schedule which can be caused by either an increase in future total productivity z’ or by a lower current quantity of capital K. An increase in z’ causes firms capitalize on higher future productivity and invest more now .
Image of page 13

Subscribe to view the full document.

Image of page 14
  • Summer '18

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern

Ask Expert Tutors You can ask bonus questions You can ask questions ( expire soon) You can ask questions (will expire )
Answers in as fast as 15 minutes