1. You own a golf course in Florida and you need to determine how many golf carts you need to buy to maximize profits.Please answer the following questions given the information below.

A brand new golf cart costs 2000 rounds of golf and the rate of depreciation is 5%.

The real interest rate is 8%

The expected marginal product of capital is given by MPKf= 1000 - 10K.

a) What is the user cost of capital and what is it expressed in?

uc =

b) How many golf carts should you buy to maximize profits (i.e., what is K*)?

K* =

c) Draw a graph (the uc / MPK graph) depicting the state of affairs and label this initial profit maximizing point as point A.

d) Now suppose the (local) government with all their financial shortfalls embarks on a campaign to raise revenue to fund the fire department by imposing a so-called "luxury tax" (we know it as ) equal to 15% of gross revenueWhat happens to the profit maximizing number of golf carts? Please show all work and round to two decimal places.

uc = K* =

e) Add the above changes and add the values as point B on your uc/MPK graph.

f) Now explain why your profit maximizing K* has changed. Please be specific using the firm's profit maximizing condition (explain the intuition!). Start your answer with "If I did not change my capital input (my K*), then I would not be.......(you can finish the rest!) ................."

g) The Federal government, knowing all about the financial pains encountered by state and local governments given the Great Recession, decides to offer an investment tax credit equal to 30% (this is in addition to the tax already imposed by the local government).What is your desired capital stock (K*) now? (Hint: An investment tax credit effectively reduces the price of capital to the firm - think of it as this - under the investment tax credit - you buy a golf cart (cost = 2000 rounds of golf) and you get a 30% rebate from Uncle Sam so the investment tax credit adjusted price of the golf cart is now 1400 rounds of golf [(1-.30) x 2000 = 1400]. Please show all work again

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