Suppose that the production function of a firm is given by Y = AK/2L'/2, where A = 1 and L = 100. Suppose further that the price of the capital good (P) is 5, the price of the final output good (P) is 2, and the real interest rate is 0.1, and the depreciation rate is 0.1. 1. What is the replacement cost of the installed capital? 2. Suppose currently we have K = 64. Calculate the market value of the installed capital (as- sume that both A and L remain at the current values in the future). What is the value of Tobin's q? Should the firm increase or decrease its capital stock? 3. What is the optimal level of capital? What is the value of Tobin's q under the optimal level of capital? 4. Suppose that there has been a large inflow of migration, so L jumped to 144. What is the new optimal level of capita?

Suppose that the production function of a firm is given by Y = AK/2L'/2, where A = 1 and L = 100. Suppose further that the price of the capital good (P) is 5, the price of the final output good (P) is 2, and the real interest rate is 0.1, and the depreciation rate is 0.1. 1. What is the replacement cost of the installed capital? 2. Suppose currently we have K = 64. Calculate the market value of the installed capital (as- sume that both A and L remain at the current values in the future). What is the value of Tobin's q? Should the firm increase or decrease its capital stock? 3. What is the optimal level of capital? What is the value of Tobin's q under the optimal level of capital? 4. Suppose that there has been a large inflow of migration, so L jumped to 144. What is the new optimal level of capita?

Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)

14th Edition

ISBN:9781305506381

Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Publisher:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Chapter8: Cost Analysis

Section: Chapter Questions

Problem 9E

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