Consider a small country with a capital stock equal to 900 units. This year it produced 20 units of new capital goods, with a depreciation rate of 20% and a production function of Y = K^1/2. What will its capital stock be next year?

Question

Quizplus · Accepted Answer

Depreciation rate is 20%, therefore the actual depreciation will be 0.2 x 900 = 180. 
The country produced 20 units of new capital goods, so its net investment is 20 - 180 = -160. 
Thus, the capital stock for next year will be: 
900 + (-160) = 740 units.

Consider a Small Country with a Capital Stock Equal to 900