QUESTION 1 a) Derive a general formula that relates capital stock and depreciation. b)The following figure shows the demand and supply curve for...
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a) Derive a general formula that relates capital stock and depreciation. 

b) The following figure shows the demand and supply curve for capital market.  Find the price of capital, output of capital, depreciation value, net investment value and capital growth at the level of capital market equilibrium.


c)    Calculate the capital rent if PK = RM50,000, δ  =  3%, rM = 15%, , π  = 5% . 

d)    Briefly explain the relationship between the demand for capital, capital rent rate and interest rate. 


a) i)   What is the user cost of capital?

ii)    Derive the general formula and function of the cost of capital.  Describe the relationship between the cost of capital and interest rate.

b)    Explain the method of measuring real user cost of capital.  If R is interest rates, is the price of investment goods, and P is the general price, explain the relationship between real user cost and these variables. 


Given a production function as follow:



where Y = output, K = capital, L = labour and a,b = coefficients.

a)    Derive the marginal product of capital (MPK).

b)    Using mathematical approach, show the effect of increasing in labour on capital and real user cost of capital.

c)    How to determine the optimal capital stock?


1. Derive investment equation of Neoclassical.  You need to state all related assumptions in your explanation.

2. SETIA JAYA firm produces a consumer product.  The output value worth RM200 million are produced using the total capital of RM350 million in the first year. Assumed that the firm is able to fulfill the demand for the first and the second periods.  The operation of the firm at desired capasity.  The gestation period (j) is three periods and partial adjustment coefficient is 0.6.  The demand for the product increases by 5 percent starting from the third period and the percentage is maintained for the following years.

i)     What is the gestation period?

ii)    Calculate the real capital stock (K), desired capital stock (K*), net investment (Ib) and potential output (Y) until the end of the partial adjustment process.

iii)    Determine the end period of partial adjustment process.

iv)    Briefly comment on the changes of inventory stock of the firm. 

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