Suppose that a machine costs $10,000 in constant dollars and the real rate of interest is 12 percent.If the machine is expected to increase in price by 2 percent and the rate of depreciation is 5 percent,then the user cost of capital for that machine over one year is equal to ________.
A)$150
B)$1,500
C)$10,000
D)$102,500

Question

Quizplus · Accepted Answer

The user cost of capital is calculated as follows:

((Real Interest Rate + Rate of Depreciation + Rate of Expected Price Increase)/1 - Rate of Depreciation) x Price of the machine

= ((0.12 + 0.05 + 0.02)/1 - 0.05) x $10,000
= (0.19/0.95) x $10,000
= $2,000

Therefore, the user cost of capital for the machine over one year is $2,000 or 20% of the initial price.

Thus, the correct answer is B, $1,500, because the user cost of capital for one year is $2,000 and the rate of depreciation for one year is $500, so the net cost to the user is $1,500.

Suppose That a Machine Costs $10,000 in Constant Dollars and the Real