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A corporation produces output with a constant market price of $70 per unit. The marginal product of capital is 1/(2K), where K is units of
A corporation produces output with a constant market price of $70 per unit. The marginal product of capital is 1/(2K), where K is units of capital, with each unit assumed to be worth $1. The life span of the capital is 10 years, implying the straight line depreciation rate =.10. The financing cost of capital is =.10. Also, assume the discount rate to use in any present value calculations is .10.
- What is the optimal level of capital for the firm?
- Suppose the corporate tax rate on accounting profits is 40%. The firm can include depreciation at the rate per year in its accounting costs, but not its financing costs. What is the optimal level of capital for the firm?
- For the scenario in b., what is the effective corporate tax rate?
- Same assumptions as b. Except, now suppose the government allows the firm to depreciate 25% of its capital costs immediately, while the remainder depreciates at the straight line rate , what is the optimal level of capital for the firm?
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