Consider Fred’s investment in units of health capital with the following function:
I = 500 − 1,000 × cost of capital.

(a) Indicate some of the components of the cost of capital, and why they are costs.

(b) If the cost of capital is 10 percent each year, what is the equilibrium health investment in terms of units of capital? What is the equilibrium total investment expenditure?
Explain both answers.

(c) If the cost per unit of health capital doubles to 20 percent, what will happen to the equilibrium level of health investment and to equilibrium health investment expenditures?
Why?