In a two-period macro capital accumulation and savings model, why is the rental price of capital...
In a two-period macro capital accumulation and savings model, why is the rental price of capital in period 2 higher at a firm with higher productivity in equilibrium? I'm assuming it is because a firm with higher productivity can produce more within the same amount of time and therefore their time is more "valuable" and so the rental price of capital at that firm is higher? Is this correct and a complete answer? What other factors are at play here?
Homework Answers
It is truly said that higher productivity of the factors lead to increase in the factor prices or rental prices. This is explained in the Solow growth model.
According to the Solow growth model, the production function is assumed to be constant and have two factors of production capital and labour. The capital labour ration provides the per capita output. According to the convergence equation in the Solow growth model, the growth rate of capital in analyzed by considering different variables. The variables include depreciation on capital, output growth rate, saving rate, population growth level, efficiency of factor and technological change. The golden rule in Solow model states that the marginal product or the growth rate of capital can be calculated by the sum of population growth rate, depreciation and growth rate of output.
According to the Cobb-Douglas production function; with constant returns keeping the other factors constant, the wage rate is calculated by the marginal product of labour and the unit of labour accumulated. Any increase in marginal product leads to increase in wage rate, keeping the labour constant. Similarly, taking capital for instance any increase in capital productivity leads to increase in rental price.
The answer is correct but incomplete. The other factors that lead to increase in the rental price along with productivity includes technological advancement, increase in saving and investment, reduction in population growth rate, higher growth rate of output, and reduction in deprecation rate.
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