Rental Rate and the Dynamics of Capital
Rental Rate and the Dynamics of Capital

Summary/Abstract: Rental rate gives the opportunity cost of a machine, that is, it accounts for the opportunities forgone by using the machine or self-renting it instead of renting it out to someone else. While the traditional approach studies how the rate at which a machine can be rented depends on the market price of that machine, it is interesting to trace the time path of the price of capital in relation to a given expected rental rate. When the rental rate is relatively stable and firms do not expect it to change with time the intertemporal equilibrium market price of the machine is the initial price. When market participants expect the rental rate to increase, the price of the machine can increase or decrease exponentially depending on the initial price level. Given that rental rate is expected to fall, the market price of capital will grow exponentially.

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