Answer to Question #139225 in Macroeconomics for Anna

Question

QUESTION
Draw and explain the effect on desired capital stock, when expected future MPK increase.

Answer 1

Marginal Product of Capital (MPK) is the excess in production of a firm brought about by an additional increase in unit of capital. This concepts is used by management teams all over the world in making on whether if each additional unit of capital is worth the investment by the firm in the long run (Layson, 2013). As capital increases, the MPK increases to till a point where any additional increase in output will result to the MPK decrease and will eventually become negative with corresponding increase in the output as illustrated in the table below. 

Reference:

Layson, S. K. (2013). The Law of Diminishing Returns and the Generalized CES Production Function (No. 13-13). University of North Carolina at Greensboro, Department of Economics.