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(Textbook Numerical Problems 4). 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 (i.e., MPKf), measured in units of output, is 165-2K, where K is the number of machines in use. There are no taxed 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.

Sagot :

The user cost of capital will be 15 units.

Price of new fabricating machine= 60 units of output

Price of a one-year-old machine = 51 units of output

Marginal cost of fabricating machine = 165 - 2K

Real interest rate = 10%

We'll then calculate depreciation which will be:

= (60 - 51)/60 × 100

= 9/60 × 100

= 15%

Therefore, the cost of capital will be:

= (Interest rate + Depreciation) × Price

= (0.10 + 0.15) × 60

= 0.25 × 60

= 15

Therefore, the user cost of capital is 15 units

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