Part 2 Resource Misallocation and Aggregate Productivity The production function of rm i is given by y; = iji-If}m, where z,- is the productivity of firm i. Let r be the rental rate of capital, 6 be the depreciation rate of capital, and at; be the wage rate of labor, and p;- be the price of the firm is product (my; is rm's revenue}. [> (a) Given that TI]: is the distortion on cost of capital for firm i, write down the prot maximiza- tion problem for the firm i, and derive the expression of marginal revenue products of capital {MRPK) of the firm i in a distorted economy. [2pt] I32 (b) \"Ii-k can be either positive or negative due to capital market distortions. Give a real-world [> [> example in China for each case. [2pt] (c) Hsieh and Klenow (2009] developed a theory showing that the extent of capital misalloca- tion is worse if there is a greater dispersion of marginal revenue products of capital across rms. Explain why. [2pt] (d) Capital market distortions can lead to total factor productivity losses. Explain this argument in your own words. [2pt] (e) Some economists argue that Chinese government should avoid stimulating the economy by instructing state-owned banks to increase business loans. Provide a rationale for this opinion using what have learned in this class. [2pt] (f) In 2009 and 2010, China undertook a 4 trillion Yuan scal stimulus, which was largely nanced by local financing vehicles (LTVs) that borrowed and spent on behalf of local governments. Provide two reasons to explain why local government is scarce of funds for implementing its public projects without LTVs. [2pt] (g) According to the paper "The Long Shadow of a Fiscal Expansion\