Suppose your company is in equilibrium,with its capital stock at its desired level.A permanent increase in the depreciation rate now has what effect on your desired capital stock?

Question

Quizplus · Accepted Answer

A permanent increase in the depreciation rate will increase the user cost of capital (the cost of owning and using capital, which includes both depreciation and the opportunity cost of tying up funds in the capital stock), leading to a decrease in the desired level of capital stock. When depreciation is higher, the user cost per unit of capital is also higher, making it less attractive to invest in new capital or maintain existing capital.

Suppose Your Company Is in Equilibrium,with Its Capital Stock at Its