Demand of capital problem
a. A firm has a fixed wage bill of $1000. If K amount of capital is invested, the annual output is Q units. It is estimated that Q = 8 ? K. If the normal return of capital in this industry is 8% and the product is sold for $5 each, how much capital should the management seek to invest in this firm?
b. The central bank suddenly increases the interest rate. As a result, normal expected return of capital invested in this industry is now 9%. Will the optimal amount of capital invested in this firm increase or decrease? By how much?
c. back to the situation of part a. if the price of the firm’s product is $4. What is the optimal amount of capital to be employed?
a. A firm has a fixed wage bill of $1000. If K amount of capital is invested, the annual output is Q units. It is estimated that Q = 8 ? K. If the normal return of capital in this industry is 8% and the product is sold for $5 each, how much capital should the management seek to invest in this firm?
b. The central bank suddenly increases the interest rate. As a result, normal expected return of capital invested in this industry is now 9%. Will the optimal amount of capital invested in this firm increase or decrease? By how much?
c. back to the situation of part a. if the price of the firm’s product is $4. What is the optimal amount of capital to be employed?