Macroeconomics homework help (1 problem)

The Missing Link Chain-Link Fence Company is

trying to determine how many chain-link fabricating

machines to buy for its factory. If we define

a chain-link fence of some specified length to be

equal to one unit of output, the price of a new fabricating

machine is 60 units of output, and the price

of a one-year-old machine is 51 units 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 165 – 2K, where K is the number of machines in

use. There are no taxes of any sort. The real interest

rate is 10% 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

Missing Link to maximize its profit.

c. Suppose that Missing Link must pay a tax equal

to 40% of its gross revenue. What is the optimal

number of machines for the company?

d. Suppose that in addition to the 40% 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 Missing Link’s desired

capital stock now? (Hint: An investment tax credit

effectively reduces the price of capital to the firm.)

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