In this chapter we derived: P × MPK = rental cost of capital or r
a. From the cash-flow valuation approach, assume that cash flows are growing at a rate of g. Derive the above equilibrium condition in this case.
b. Based on your answer in (a), explain in a neoclassical sense why China's investment rates are so high compared to the United States.

Question

Quizplus · Accepted Answer

The Answer is a. In this case NPV = - ΔK + CF(K)/(r-g) and the new equilibrium condition is:
MPₖ = r - g
b. Arithmetically the right hand side is smaller than in the case in the textbook and this means that the condition allows for even more investment to the point where MP_K is also small. In simpler terms, high growth opportunities mean more investment.

In This Chapter We Derived: P × MPK = Rental