The problem of a firm is given by:

max N ,N' ,I zF (K ,N ) w N I + ((z'F (K',N') w'N' + (1 d )K')/(1 + r)

subject to K' = (1 d )K + I and zF(K ,N ) = z K N^(1) where K is given. 1.

Write down the optimality condition that determine I .

2. Derive the optimal I by solving the equation above.

3. How does I react to r,K and z' ? What is the relationship between I and z' . What does this result imply about I?