Economics.

Investment. Consider now the firms' side of this economy. Suppose the marginal product from em- ploying an extra unit of capital are captured by M PK 2 aSka'l Where S = 1; a = 0.3. Assume further that the depreciation rate of capital is :5 = 0.06, and the interest rate is 1 + r. I show rst graphically (Without using numbers or calculations) the investment decision of the rm. How is capital k determined? - compute the capital decision when the interest rate is as you computed for economy 1 in the previous question. I compute the capital decision when the interest rate changes to what you found in economy 2. What happens to investment as the interest rate changes? Show graphically and numerically and discuss briey your ndings