Question1. PART 1 (35 points total – 5 points for each par

1. PART 1 (35 points total – 5 points for each part and 10 points for the diagram) You own a golf course in Florida and you need to determine how many golf carts you need to buy to maximize profits. Please answer the following questions given the information below.

A brand new golf cart costs 300 rounds of golf and the rate of depreciation is 15% (.15).

The real interest rate is 5% (use .05 in calculations).

The expected marginal product of capital is given by MPK^f = 200 – 5K.

a) What is the user cost of capital and what is it expressed in?

b) How many golf carts should you buy to maximize profits (i.e., what is K*)?

c) Draw a graph (the uc / MPK graph) depicting the state of affairs and label this initial profit maximizing point as point A.

c) Now suppose the (local) government with all their financial shortfalls embarks on a campaign to raise revenue to fund the fire department by imposing a so­called “luxury tax” (we know it as ?) equal to 25% of gross revenue What happens to the profit maximizing number of golf carts?

Please show all work and label as point B on your uc/MPK graph.

d) Now explain why your profit maximizing K* has changed. Please be specific using the firm’s profit maximizing condition (explain the intuition!). Start your answer with “If I did not change my capital input (my K*), then I would not be…….(you can finish the rest!)

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