ECON 2000 Lecture Notes - Lecture 86: Capital Good

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ECON 2000
Lecture 86
- MPK = αA (L/K)( 1-α) R / P = αA (L/K)( 1-α)
- The second equation:
o the lower the stock of capital, the higher the real rental price
o The greater the amt of labour employed, the higher the real
rental price of capital
o The better the tech, the higher the real rental price
- Events reducing capital stock or raising employment or improve tech
raise equilibrium real rental price of capital
Cost of capital
- Rental firms buy capital goods and rent them out
- Benefit of owning capital is the revenue earned by renting it out to the
production firms
- Rental firms receives real rental price of capital R/P for each unit of
capital it owns and rents out
- For each period of time that rental firm rents out a unit of capital,
rental firms bears three costs:
1. When rental firm borrows to buy unit of capital which it intends to rent
out, it must pay interest on the loan
a. If PK is purchase price of unit of capital and i is nominal int rate,
then iPK is interest cost
b. Interest cost would be same even if rental firm did not have to
borrow: if rental firm buys a unit of capital using cash on hand, it
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Document Summary

Mpk = a (l/k)( 1- ) r / p = a (l/k)( 1- ) Events reducing capital stock or raising employment or improve tech raise equilibrium real rental price of capital. Rental firms buy capital goods and rent them out. Benefit of owning capital is the revenue earned by renting it out to the production firms. Rental firms receives real rental price of capital r/p for each unit of capital it owns and rents out. Assume price of capital goods rises with prices of other goods, so. Real cost of capital cost of buying and renting out a unit of capital measured in units of the economy"s out. = (pk / p)( r + ) real cost of capital depends on relative price of a capital good pk / p, real int rate and dep rate. Profit rate = revenue cost = r/p (pk / p)( r + )

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