Assume the real interest rate is still 10%. If the firm from the previous question (question 3) can buy that piece of machinery that will generate the given profit stream for the next 5 years for $8,000 today, should the firm invest in the machinery? A. Do not invest in the machinery. B. Invest in the machinery.

3. Consider a dynamic (two-period) representative firm's problem. This representative firm is given K unit of capital to produce in the current period. Firm can choose (current-period and future-period) labor demands and investment (to adjust future- period's capital stock) to maximize its present-value lifetime profit. Given that the market interest rate is r and the capital depreciation rate is & after production in each period. Let's further assume that this firm sells all the capital after future-period production. (a) Clearly definite the profit functions for both periods and write down this repre- sentative firm's problem. (b) Write down the optimal condition on investment. Intuitively explain the optimal condition. (c) Suppose K increases, graph the change of investment curve. Intuitively explain the changes on the graph you just drew.

Edward the entrepreneur takes 2 hours to cut a lawn, and he cuts 1,000 lawns per year. He uses solar-powered equipment (truck and mower) that will last forever- and can be sold at any time for $40,000. Edward could earn $11 per hour as a pedicurist. The interest rate is 10 percent. Given his current output level, compute his average cost of cutting lawns. $20 $24 $22 $28 $26