7 Optimal level of capital Assume a Cobb Douglas function with a = 0.5, A = 1 and L = 10. Create table with capital going from 0 to 10, and then calculate the output and the marginal product of capital in the two ways we did it in class (as the difference in product and with the derivative formula). Then, use this table to answer the following questions: 1. Is the marginal product of capital decreasing or increasing? 2. If the firm is maximizing profits, what condition should be satisfied? 3. If the interest rate is equal to 0.6, according to this table, what is the optimal level of capital. 4. Assume that the productivity drops to 0.9. Do you expect that the optimal level of capital increases or decreases? Explain your answer.

7 Optimal level of capital Assume a Cobb Douglas function with a = 0.5, A = 1 and L = 10. Create table with capital going from 0 to 10, and then calculate the output and the marginal product of capital in the two ways we did it in class (as the difference in product and with the derivative formula). Then, use this table to answer the following questions: 1. Is the marginal product of capital decreasing or increasing? 2. If the firm is maximizing profits, what condition should be satisfied? 3. If the interest rate is equal to 0.6, according to this table, what is the optimal level of capital. 4. Assume that the productivity drops to 0.9. Do you expect that the optimal level of capital increases or decreases? Explain your answer.

Economics: Private and Public Choice (MindTap Course List)

16th Edition

ISBN:9781305506725

Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Publisher:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Chapter21: Costs And The Supply Of Goods

Section: Chapter Questions

Problem 12CQ

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