Use the neoclassical theory of investment to explain why technological

Use the neoclassical theory of investment to explain why technological progress that reduces the price of computers (and related information technology) impacts investment differently than technological progress that makes computers more productive.

What will be an ideal response?

ANSWER

Expected improvements in productivity cause the marginal product of capital curve to shift up. Reductions in the price of capital goods (such as computers) cause the user cost of capital curve to shift down. In either case, the desired level of capital and of investment increase. Expected reductions in the price of capital goods increase the user cost of capital. The size of the increase in the desired level of capital depends on the size of the expected productivity increase and the actual price decrease relative to the expected price decrease.