a. Using diagrams as aids, explain the changes in the

optimal investment schedule for:

i.

A decrease in

z'

ii.

A decrease in

z.

b.

Using the optimal investment schedule diagram, explain the effects of a decrease in

r

on the optimal investment schedule and investment demand.

c.

Derive the optimal investment rule for the firm under the following assumptions:

i.

The depreciation rate is 0.5

ii.

The MC of investment is 1 consumption unit.

iii.

Any capital remaining at the end of the second period can be sold at a

price of

2 consumption units.