revenue product of capital—the annual MRP generated by each computer
is less than for the previous one. The third column computes the PV of
the stream of MRPs for each computer, and these are plotted in the
accompanying figure. If the purchase price of a computer is $2000, the
firm will choose to own only three computers; any additional computer
delivers a PV of MRPs that is less than the purchase price and thus is not
profitable to the firm. An increase in the purchase price of a computer to
$2400 would lead the firm to reduce its desired stock of computers to two.
What economic events, other than a change in the price of capital, might
lead the firm to change its optimal capital stock? In terms of the example
shown in Figure 15-2 , anything that increases the PV of the future MRP
of computers will increase the height of the bars in the figure and, for a
given purchase price of computers, lead the firm to purchase more
computers. More generally, anything that increases the PV of the future
MRPs of capital will lead firms to increase their desired capital stock. This
can occur in two general ways.
Increase in Future MRPs
If capital becomes more productive so that the stream of future MRP
increases, firms will choose to own more capital, even if the purchase
price of capital is unchanged. For example, in Figure 15-2 , if a
technological improvement increases the annual MRP for each computer
by 20 percent, each computer’s PV will also increase by 20 percent. The
bars in the figure will increase in height and, for any given purchase price,
the firm will increase its desired stock of computers.