ECON 2000 Lecture Notes - Lecture 87: Fixed Investment, Tax Credit, Historical Cost
14 May 2018
School
Department
Course
Professor
ECON 2000
Lecture 87
- Firm’s decision to either add more or let capital depreciate depends
on whether owning and renting out capital is profitable
- Change in capital stock called net investment depends on difference
between MPK and cost of capital
- For a firm that owns and uses capital, benefit of an extra unit of
capital is MPK and cost is cost of capital
- ΔK = In [MPK – (PK / P)( r + δ)] → In [ ] shows how much net
investment responds to incentive to invest
- Investment function → I = In [MPK – (PK / P)( r + δ)] + δK → business
fixed investment depends on MPK, cost of capital and amt of dep
- Decrease in real int rate lowers cost of capital which raises amt of
profit from owning capital and increases incentive to accumulate
more capital
- Increase in real int rate raises cost of capital and leads firms to
reduce investment
- Event that raises what business managers expect MPK to be,
increases profitability of investment and causes investment schedule
to shift right
o E.g. tech innovation increases A raising MPK and for any given
int rate, increases amt of capital goods that rental firms wish to
buy
- Drop on consumer confidence leads managers to fear that their sales
will be low
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Document Summary
Firm"s decision to either add more or let capital depreciate depends on whether owning and renting out capital is profitable. Change in capital stock called net investment depends on difference between mpk and cost of capital. For a firm that owns and uses capital, benefit of an extra unit of capital is mpk and cost is cost of capital. K = in [mpk (pk / p)( r + )] in [ ] shows how much net investment responds to incentive to invest. Investment function i = in [mpk (pk / p)( r + )] + k business fixed investment depends on mpk, cost of capital and amt of dep. Decrease in real int rate lowers cost of capital which raises amt of profit from owning capital and increases incentive to accumulate more capital. Increase in real int rate raises cost of capital and leads firms to reduce investment.
