1. 1 Lecture 11 Various Micro-topics Charit Tingsabadh M.Sc. Programme in Environmental and natural resource economics Semester 1/2005

2. 2 Topics Capital and investment Empirical demand and cost functions Corruption

3. 3 Capital and Investment Capital as factor of production Source of capital – saving = income not consumed in current period Choice between present and future consumption Rate of time preference Opportunity cost of capital

4. 4 Investment Rental rate – r – from MR.MPk = r MR = marginal revenue, MPk = marginal product of capital Rental r, interest i, maintenance m and depreciation d r > i+m+d, for a capital renting firm Buying equipment, reverse the above.

5. 5 Appraisal of investment project Benefit (B), Cost (C), discount rate d, time t Present value of investment PV = S t (B t -C t )/(1+d) t >= 0 Other indicators: internal rate of return d* to make PV=0 d*>i Benefit cost ratio (BCR) = PVB/PVC >1

6. 6 Empirical demand and supply functions Demand: perhaps adequate demand systems(Almon) Production/Cost function: Cobb-Douglas, CES, Translog Recognise and interpret

7. 7 Demand function Perhaps adequate demand system AIDS: good I, price p, income y, s = share of good I in total expenditure Almon demand function xi per capita consumption, c constant

8. 8 Almon demand function Make certain assumptions on substitutions

9. 9 Then…

10. 10 Empirical estimates..

11. 11

12. 12 For food and cars..

13. 13 Production/cost functions Production Q as function of factor inputs- capital K and labour L, Cost of production C as function of wages w and interest i. So Consider some fucntional forms Cobb-Douglas, CES, Translog

14. 14 Cobb-Douglas

15. 15 Estimation Also useful for growth accounting exercise

16. 16 CES production function

17. 17 Translog: Specification

18. 18 Translog cost function

19. 19 Results

20. 20 Corruption How to consider corruption economics? Develop a model

21. 21 In praise of microeconomics As a tool for thinking about situations Understand motivations and behaviour of agents Rational explanation of strange behaviour Enjoy!!