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?
A)raises it,because the future marginal productivity of capital is higher
B)lowers it,because the future marginal productivity of capital is lower
C)raises it,because the user cost of capital is now lower
D)lowers it,because the user cost of capital is now higher

Question

Quizplus · Accepted Answer

A permanent increase in depreciation rate leads to a higher user cost of capital, which is the cost of using capital in production. This higher user cost of capital makes investment less attractive, which leads to a reduced desired level of capital stock. Therefore, the correct answer is D - a permanent increase in the depreciation rate lowers the desired capital stock.

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