2. The missing Monkey Poo Company is trying to determine how many poo fabricating machines to...

2. The missing Monkey Poo Company is trying to determine how many poo fabricating machines to buy for its factory. The of a new fabricating machine is 50 units of output, and the price of a one-year-old machine is 42 unit of output. These relative prices are expected to be the same in the future. The expected future marginal product of fabricating machines, measured in units of output, is 140-2K, where K is the number of machines in use. There are no taxes of any sort. The real interest rate is 8% per year:

a. what is the user cost of capital? Specify the units in which your answer is measured.

b. Determine the number of machines that will allow the company to maximize its profits.

c. Suppose that the company must pay a tax equal to 30% of its gross revenue. What is the optimal
number of machines for the company?

d. Suppose that in addition to the 30% tax on revenue described in part (c), the firm can take advantage of a 20% investment tax credit, which allows it to reduce its taxes paid by 20% of the cost of any new machines purchased. What is the desired capital stock now? (Hint: An investment tax credit effectively reduces the price of capital to the firm.)

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Expert Solution

Rahul Sunny answered 1 year ago

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