 changes in the desired capital stock. Dear students, I have discussed how the desired capital stock is determined. It is determined by the user cost and by the value of the margin product of capital. So, if there is any change in the margin product of capital or in the user cost, so this will change the desired level of capital stock. What are the factors that can change the user cost or the margin product of capital? We will discuss them. The user cost can change if there is a change in the real interest rate, if there is a change in the depreciation rate and if there is a change in the price of capital. If you recall, the user cost is of two kinds. First, we have to pay the interest for financing and the interest will depend on the price. The interest payment will depend on the price, so if the price changes or increases, the interest payments will also increase. This is related to the price of capital and if the interest rate changes, then the price of capital interest payments will change. Similarly, the nature of the second cost is that it depreciates any capital unit over time. It depreciates and its value decreases. So, this is another type of cost. So, in these three things, whatever change comes, this will affect the user cost and it will ultimately affect the desired level of capital stock. And secondly, the margin product of capital. If there is a change in that, then we have read that if there is any technological improvement, your production function shifts upward. As a result, the margin product of capital also increases. So, even if it increases, the desired level of capital stock will change. Graphically, if we want to understand this, then the first case we are taking, for example, the user cost is changing and the user cost is changing due to a change in the real interest rate. We are assuming that the real interest rate decreases. There are other things that are constant and other things that were in the user cost. The price of the capital and the depreciation rate. So, we are assuming that the price of the capital is the same and the depreciation rate is the same, but the interest rate decreases. The horizontal line of the user cost will shift downward due to the interest rate. In the last module, we assumed that the interest rate is 8 percent and the depreciation rate was 10 percent. So, our user cost was calculated with 18. The price of capital we assumed was 100. And now we are assuming that if the interest rate is 6 percent, then the user cost will be 16 percent. The margin project of capital curve was first intersecting with A and the desired level of capital stock was determining 5. Now, what will happen? Due to the downward shift of the user cost curve, what was before A was that the marginal benefit and cost were equal. So, we stopped there. This was the desired level of capital stock and this was the profit maximizing point for the firm. But now what? Now, this unit firm is providing the profit because the benefit of the cost has decreased, but the cost has decreased. So, now, it will increase in its capital stock and now 6 is the profit maximizing point of the firm and the desired level of capital stock. Similarly, we take the second case where the user cost is the same but due to an improvement in the technology, the margin product of capital is increased and the curve of the margin product of capital is shifted upward. So, this will also impact that before the technological improvement, A was the optimal level of capital stock. Now, due to its upward shift, it will shift from A to D and it will increase in its capital stock. So, this is how we understood the desired capital stock was determined where the margin product of capital and user cost were equal. Now, any sub-effector that will affect the margin product of capital or the user cost will also affect the desired level of capital stock. There is one more thing that we want to add. We haven't added it yet. What will be the impact of the government's taxes on the desired level of capital stock? That the return that the firm is getting which we call the margin product of capital. If the government imposes taxes on it, then the return which is the margin product of capital is 20. If the government imposes taxes on it, then the capital unit will run 20 dollars. But because of that 20 percent tax, 4 dollars will go to the government and how much will be left to the firm? 16 dollars will be left. Now, what we have to consider the return is after tax, i.e. 1 minus T is the tax rate. If it is 20 percent, then 1 minus T times MPK this will be the return on the capital. So, what the firm has to choose? The firm chooses its desired capital stock so that the return equals the user cost. So, what will change now? The user cost is the same which we talked about earlier. But on the return side, with MPK, now we have 1 minus T times MPK. T is the tax rate. Okay? If it is 20 percent, then it means that if MPK is 20, as I talked about, and 20 percent tax, now we will multiply 20 with 1 minus T and find the value. So, the answer will be 16. So, the firm has to equal 16 with the user cost. So, the user cost, by rearranging this, if you take 1 minus T on the other side, then the user cost will be divided by 1 minus T and the expression of the user cost will be put R plus D times P K 1 minus T. So, now MPK will adjust the user cost with the tax and equal it. This will determine the desired level of capital stock. When we divide the user cost with 1 minus T, we are saying that tax adjusted user cost of capital. So, if there is an increase in this tax rate, tax pose increases, tax rate is 25 percent. So, what will happen in the third? 1 minus T will decrease. With the increase of T, earlier, 1 minus T was 0.2 minus, the answer was 0.8. Now, T, the tax rate has increased. It has become 0.3. So, 1 minus T will be 0.7. So, if you divide the user cost with 0.8 instead of 0.7, then the number will increase. If you can understand this, that the tax rate increases, the tax adjusted user cost will increase. So, an increase in T will raise the tax adjusted user cost and with the increase of the user cost, we have seen in the diagram that the curve of the user cost will shift to the top and the capital stock will decrease from the beginning. Regarding taxes, what we have talked about, we have assumed that to keep our model, the government imposes taxes on revenue. But usually, the taxes on the forms are on profit. There are many more complications in this. How will the profit be determined? Now, depreciation will be involved. When the depreciation is more, the profit will decrease. Similarly, sometimes, the government gives investment tax credits. To incentivize the firms to invest more, they give tax credits. So, this is another thing that we can include in this. But keeping it simple, we understand that when the tax increase, then the desired level of capital stock will decrease and vice versa. Thank you very much.