Suppose you have $100 to invest. You can hold it in cash, you can deposit it in some savings account that pays a nominal interest rate of 0.5%, or you can invest in physical capital. The real rate of return on capital is 1%. The inflation rate is -1%. The three options are risk free. The optimal decision is to: hold some cash and invest the rest in capital invest the $100 in physical capital deposit the $100 in the savings account hold the 100$ in cash
Suppose you have $100 to invest. You can hold it in cash, you can deposit it in some savings account that pays a nominal interest rate of 0.5%, or you can invest in physical capital. The real rate of return on capital is 1%. The inflation rate is -1%. The three options are risk free. The optimal decision is to: hold some cash and invest the rest in capital invest the $100 in physical capital deposit the $100 in the savings account hold the 100$ in cash
Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)
14th Edition
ISBN:9781305506381
Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris
Publisher:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris
Chapter7: Production Economics
Section: Chapter Questions
Problem 1.5CE
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Question
![Suppose the production function takes the form
F(K, L) =
The capital share is equal to:
ⒸĀK
13
L
L+K
ĀK
K+L
ĀKL
K+L](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F85e2fdce-e8d6-4d14-abeb-b7fe4de83f35%2Fba68d77a-f800-4b06-b01f-b97d5299aa88%2F1od6uy_processed.png&w=3840&q=75)
Transcribed Image Text:Suppose the production function takes the form
F(K, L) =
The capital share is equal to:
ⒸĀK
13
L
L+K
ĀK
K+L
ĀKL
K+L
![Suppose you have $100 to invest. You can hold it in
cash, you can deposit it in some savings account that
pays a nominal interest rate of 0.5%, or you can
invest in physical capital. The real rate of return on
capital is 1%. The inflation rate is -1%. The three
options are risk free. The optimal decision is to:
hold some cash and invest the rest in capital
invest the $100 in physical capital
deposit the $100 in the savings account
hold the 100$ in cash](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F85e2fdce-e8d6-4d14-abeb-b7fe4de83f35%2Fba68d77a-f800-4b06-b01f-b97d5299aa88%2F1nikbk7_processed.png&w=3840&q=75)
Transcribed Image Text:Suppose you have $100 to invest. You can hold it in
cash, you can deposit it in some savings account that
pays a nominal interest rate of 0.5%, or you can
invest in physical capital. The real rate of return on
capital is 1%. The inflation rate is -1%. The three
options are risk free. The optimal decision is to:
hold some cash and invest the rest in capital
invest the $100 in physical capital
deposit the $100 in the savings account
hold the 100$ in cash
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