ECO3020F tutorial 9

firm's aim maximise profits MCand MB
measured in terms of
PV of profits
invest until MC MB
investing in 1 unit of
Marginal cost what the firm gives up by
capital in current periodof
an extra unit of investment
marginal benefit benefits to the PV of profits
in the current period added
for future profit
MCCI I one unit of current profitgivenup
MB MPK 1 d Itr
MC MB I MPK 1 d Itr
rule
MPK d r firm's optimal investment
of
real rate interest
future MPK net of depreciation
r opportunity cost
of investment to the firm
the firm needs to invest MPK r The opportunity cost
that could be earned
of investing in capital is the rate
from lending in credit market optimal investment
schedule down ward sloping how much investment is
of future capital
required for net marginal product
real interest rate

, note

K


2


K
N skiter keo
j
i




N current unemployment
a
y.im ntoafpat
b
in current callital stock MPL labourdeman
NY to NE N
left shift of output supply curve y Lo y

in current tarpital stock MPK I right shift
of output demand curve 4949 to
Goods market equilibrium Pr and Y outputsupply
effects output demand effects leisure
NS to Ns
r labour supply N
w and
labour market equilibrium
overall effect Y and C
I ambiguous should