Assume the following: (1) the real cost of a unit of capital is one; (2) the unit of capital is expected to increase a firm's real profit by $10,000 each year, and depreciate by 10% each year; and (3) the real interest rate is 2%. What is the "user cost" or "rental cost" of this unit of capital?
A) 0.09.
B) 0.03.
C) 0.12.
D) 0.15.
E) 0.18.

Question

Quizplus · Accepted Answer

The user cost of capital is calculated as the sum of the real interest rate and the rate of depreciation of the capital. In this case, the rate of depreciation is 10%, and the real interest rate is 2%. Therefore, the user cost of capital is 0.1 + 0.02 = 0.12, or 12%.

Assume the Following: (1) the Real Cost of a Unit