Question
Consider the following information about a firm: Marginal product of capital in the next year: MPK = 206 - 4K units of output per additional
Consider the following information about a firm:
Marginal product of capital in the next year: MPK = 206 - 4K units of output per additional unit of capital per year
Real interest rate: r = 0.05 per year
Depreciation rate of capital: d = 0.10 per year
Price of capital: pK = 200 units of output per unit of capital
Capital stock at beginning of year: K0 = 40 units of capital
Assume now there is a 40% tax on firms' output and depreciation and interest payments are not tax deductible. What is the desired level of the capital stock at the beginning of the next year?
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