investment (L12) Flashcards
1
Q
investment
A
new k + inventories + new housing
ignoring inventory n housing I is determined by current capital choice
2
Q
assumptions of a profit maximising firm
A
capital is rented at r wages is w price is fixed at p=1
3
Q
profit
firms max profit
A
profit=y-rK-wL
max profit=K^aL^1-a -rK-wL
4
Q
optimal investment condition
A
MPK=r when factor price and PF meet
5
Q
what happens to K/L ratio with the decline in rental price
A
declines too, less industrialisation when interest rates are higher , wages rise when there’s more capital
