Problem No:2

PART A

Given Marginal product of capital (MPK) and tax adjusted user cost of capital as

= , = (+). Derive the equation of desired capital stock and

1

investment .

PART B

If = 20 0.02, = 0.2, = 0.5 = 0.1 = 1. Show that

i. = by numerically and graphically.

ii.At calculate the value of investment if current capital stock is 900 units of capital.