According to the neoclassical model of investment, the immediate impact of an earthquake that destroys part of the capital stock will be to:
A) increase the cost of capital, the rental price of capital, and the rate of investment.
B) increase the rental price of capital and the rate of investment, but to leave the cost of capital unchanged.
C) increase the rental price of capital and the cost of capital, but to leave the rate of investment unchanged.
D) increase the rental price of capital and the rate of investment, but to decrease the cost of capital.

Question

Quizplus · Accepted Answer

According to the neoclassical model of investment, a decrease in the capital stock due to an earthquake will initially increase the rental price of capital (since there is less capital to rent), but will not affect the cost of capital (which is determined by the interest rate). As a result, firms will respond by investing more in new capital to take advantage of the higher rental price, leading to a higher rate of investment.

According to the Neoclassical Model of Investment, the Immediate Impact