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A firm has current and future marginal productivity of capital given by MPK = 10,000 - 2K + N,and marginal productivity of labour given by MPN = 50 - 2N + K.The price of capital is $5,000,the real interest rate is 10%,and capital depreciates at a 15% rate.The real wage is $15.
a.Calculate the user cost of capital.
b.Find the firm's optimal amount of employment and the size of the capital stock.
Time Value
The principle that current money has a higher value than the same amount would in the future, given its potential to earn more.
Money
A medium of exchange that is widely accepted in transactions for goods and services, acting as a unit of account, a store of value, and sometimes, a standard of deferred payment.
Compounding
A method in which an investment's worth grows over time as the returns, including both capital gains and interest, accumulate interest.
Compound Interest
The practice of charging interest on the principle amount along with the interest that has been piled up from past periods, relevant to both lending and saving scenarios.
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