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MACROECONOMICS
not subject to dynamic consideration. At each moment of time, the firm should
hire labour up to the point where the value of its marginal product equals the
wage. Equation (A4.2.5) by contrast illuminates the intertemporal nature of
the firm’s investment decision. It states that along the optimal path the value
of the marginal product of capital (the left-hand side) equals the marginal user
cost of capital (the right-hand side), or the value of the marginal cost attached
to adding an additional unit of capital. This comprises three components.
The first is the purchase price of the additional unit of capital—the term ...
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