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Investment (Neo-Classical model (Production function (Cobb-Douglas (2…

- - - - 2 inputs; physical capital and labour
- - - - Share price = (Value of economy determined by stock market)/ (Price of capital should it be repurchased today)
    - - Stock market values installed capilat more than replacement cost
      - Net investment will increase
        
        Profitable for firms to own more capital
      - Increase in stock price is a signal that investment is expected to increase
    - - Stock market values capital less than the replacement cost
      - Net investment decreases
        
        MPK is below the cost of capital
      - Firms are incurring losses on their capital
- - - - Real benefit of renting capital is the price the firm gets from renting the capital
    - - Real cost of renting consists of
        
        Interest paid on loan from borrowing capital
        
        Changes (loss or benefit) in the price of capital
        
        Depreciation