Markets for Factors of Production-LOS f 习题精选

An increase in the supply of capital, assuming no change in the demand for capital, will cause the equilibrium interest rate to fall.

Individuals generally save less (and borrow more) when they expect to earn higher incomes in the future. Conversely, they increase their savings when they expect lower future incomes, such as when workers approach retirement. Higher interest rates encourage savings, or trading present consumption for future consumption. Increases in current incomes encourage savings, while decreases in current incomes discourage savings.

The supply of capital is the savings of individuals. The three primary factors that affect savings behavior are interest rates, current incomes, and expected incomes. The number of attractive investment opportunities (i.e., positive net present value projects) will influence the demand for capital.

The marginal revenue product of capital is the prospective gain from adding capital to the production process. Since these gains occur many years into the future, they must be discounted at the cost of financial capital to obtain a present value. It is this present value that is compared with the cost of the project to determine whether or not the project should be accepted.

The returns to labor are relatively immediate, and can be compared with the overall wage cost of the labor. The returns from the addition of capital occur over a span of years, so must be discounted back to today and evaluated as present values versus the cost of the capital.