The following table shows the investment and output options for an individual b...
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The following table shows the investment and output options for an individual business. Employment of labour and technology is assumed to be constant.
Capital stock (Number of machines) | Output (Number of units) |
0 |
|
1 | 5 |
2 | 9 |
3 | 12 |
4 | 13 |
The business operates in competitive product and factor markets. Its output sells for $100. The price of a new machine is $4,000, the nominal interest rate is 10%, inflation is 2%, and the depreciation rate is 1%. How many machines will the business choose to invest in? Use decimals for inflation, interest rates and the depreciation rate when calculating the user cost of capital.
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