$Q16$

$2$ Points

Consider the real intertemporal model with investment $(introducedinCh11of$ the textbook$)$ that

$we$ have learned $in$ class. Additionally, now suppose that $we$ modify the model $of$ the firm's

investment behavior $by$ assuming that any capital the firm has remaining $at$ the end $of$ the period

can $be$ sold $at$ the price $p_K^{\text{'}}(in$ our model $we$ assumed the capital could $be$ sold $at$ a price $of$ one, $in$

terms $of$ consumption goods$).$

$Q16\mathrm{.}1$

$1$ Point

Determine the optimal investment rule for the firm under the aforementioned new assumption.

$M{P}_K^{\text{'}}-d-p_K^{\text{'}}=r$

$M{P}_K^{\text{'}}-d+p_K^{\text{'}}=r$

$M{P}_K^{\text{'}}-(1-d)p_K^{\text{'}}=(1+r)$

$M{P}_K^{\text{'}}+(1-d)p_K^{\text{'}}=(1+r)Q16\mathrm{.}2$

$1$ Point

$If{p}_K^{\text{'}}$ increases, what effect does this have $on$ the firm's optimal investment schedule?

The optimal investment schedule shifts $to$ the right and the firm increases its current$-$period

investment.

The optimal investment schedule shifts $to$ the left and the firm decreases its current$-$period

investment.

Neither the optimal investment schedule nor the firm's investment decision changes.

The optimal investment schedule could shift either $to$ the right $or$ left, and the firm's current$-$

period investment could increase $or$ decrease accordingly.