We will now explore another way to derive an optimal investment equation. First, rewrite the capital...

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We will now explore another way to derive an optimal investment equation. First, rewrite the capital accumulation identity as: K = (1-8)K+I 1 (3') Now assume that the firm is around for two periods. In this case the managers will maximize the following: II 2 II V = 1 + 1+r (1+r) (5) For simplicity, assume as well that there are no adjustment costs to installing new capital. Output in each period is produced by the following Cobb-Douglas production function (for simplicity we ignore labour and total factor productivity): Y = Ka 0 We will now explore another way to derive an optimal investment equation. First, rewrite the capital accumulation identity as: K = (1-8)K+I 1 (3') Now assume that the firm is around for two periods. In this case the managers will maximize the following: II 2 II V = 1 + 1+r (1+r) (5) For simplicity, assume as well that there are no adjustment costs to installing new capital. Output in each period is produced by the following Cobb-Douglas production function (for simplicity we ignore labour and total factor productivity): Y = Ka 0