Question

explain desire capital stock with the help of diagram?

Answer 1

The desired capital stock is the amount of financial assets or capital assets that a firm would want to have, when profit can be maximized by the firm.

From this graph, we can clearly infer that, there is a directly proportional relationship between the expected Marginal product of capital and the desired capital stock. This is because, for any given quantity of capital, it would be more useful in the future. The MPK curve slopes negatively, in relation with the law of diminishing returns. From the graph it can also be seen that a higher user cost of capital(rc1), implies a lower desired capital stock(K1) - this is because profits are lower on per unit of capital, for a high user cost, and vice versa.