(60 points total) You own a fleet of offshore fishing boats and you need to determine how many fishing poles you need to buy to maximize profits. Please answer the following questions given the information below. Please be sure to SHOW all work!

A brand new fishing pole cost 400 fishing hours (this is your output) and the rate of depreciation is 12%.

The real interest rate is 3%.

And the expected marginal product of capital is given by:

MPK^f = 500 5K.

There is a tax on capital so tao () = 20% (.20)

a) (5 points) What is the (tax adjusted) user cost of capital and what is this user cost expressed in? (Show work) (5 points)

b) (5 points) How many fishing poles should you buy to maximize profits? Show work (5 points)

Draw a uc/K graph depicting the state of affairs and label this initial profit maximizing condition as point A.

A correctly drawn and completely labeled diagram is worth 15 points

Suppose that there are two shocks that happen simultaneously.

i) the Government offers an investment tax credit (ITC) equal to 20% (.20)

ii) the marginal product of capital changes to: MPK = 510 5K.

c) (5 points) Resolve for K* and show as point B on your uc/K diagram ( 5 points).

d) (10 points) Explain the intuition as to why you changed your behavior, why the profit maximizing level of fishing poles has changed. Be specific and write this like you were a professional economist! Begin with:

'At the same K'.......................

e) (10 points) Now the Federal Open Market Committee (FOMC) meets and agrees that the K* from part c), after the two shocks, is too high and they are fearful of overheating. They agree that the optimal K*, the K* consistent with the Fed's dual mandate equals 88. What would Fed have to do to meet this objective? Show all work. Label this as point C on your diagram.

f) (10 points) Explain the intuition as to why you changed your behavior, why the profit maximizing level of fishing poles has changed. Be specific and write this like you were a professional economist! Begin with:

'At the same K'.......................