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Suppose a country has a Cobb-Douglas production function as Y= A K^0.3 N^0.7, Y= $5 trillion, and rental cost of the capital rc=12%

Calculate the desired capital stock K*. 

Now suppose that Y is expected to rise to $6 trillion. What is the corresponding desired capital stock

Suppose that the capital stock was at the desired level before the change in income was expected. Suppose further that ?=0.4 in the gradual adjustment model of investment. What will the rate of investment be in the first year after expected income changes? In the second year? 

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Sep 13, 2020

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