Answered step by step
Verified Expert Solution
Question
1 Approved Answer
This is all the info there is. I don't understand how to derive the Euler equation when the adjust cost function doesn't have K in
This is all the info there is. I don't understand how to derive the Euler equation when the adjust cost function doesn't have K in it
Consider the infinite horizon model of a firm facing adjustment costs to invest- ment. The firm pays a corporate income tax, Tt, and it also benefits from an investment tax credit, at the rate se on its investment expenditures. For the sake of simplicity, we assume that the tax credit applies to total investment cost, including adjustment cost. The firm managers maximizes its present value of the firm, V 1 VO +nje {(1 7o)F(K.) Pki(1 8:1)[e+C(1)}} (1) t=0 where F(Kt), is the net output from using the capital stock Kt, (F' > 0 and F" 0) 1. Denoting by at the shadow value of the capital stock (a) Write the firm optimization problem using the Lagrangian approach (make sure to indicate all decision variables) (3 points) (b) Derive and interpret all the first-order conditions of this problem. (10 points) (c) Using the investment Euler equation, and making the appropriate assumptions, determine the expression of the shadow value of capital, 9t. Interpret this expression. (7 points) 2. Determine the expression of the firm's investment demand function. In- terpret. (5 points) Consider the infinite horizon model of a firm facing adjustment costs to invest- ment. The firm pays a corporate income tax, Tt, and it also benefits from an investment tax credit, at the rate se on its investment expenditures. For the sake of simplicity, we assume that the tax credit applies to total investment cost, including adjustment cost. The firm managers maximizes its present value of the firm, V 1 VO +nje {(1 7o)F(K.) Pki(1 8:1)[e+C(1)}} (1) t=0 where F(Kt), is the net output from using the capital stock Kt, (F' > 0 and F" 0) 1. Denoting by at the shadow value of the capital stock (a) Write the firm optimization problem using the Lagrangian approach (make sure to indicate all decision variables) (3 points) (b) Derive and interpret all the first-order conditions of this problem. (10 points) (c) Using the investment Euler equation, and making the appropriate assumptions, determine the expression of the shadow value of capital, 9t. Interpret this expression. (7 points) 2. Determine the expression of the firm's investment demand function. In- terpret. (5 points)Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started