Answer to Question 3:
Suppose that the economy has a capital stock of 200 units and
that each unit of capital produces 0.2 units of income. What is
the maximum amount that the residents of this economy can consume in
the current year?
The correct answer is 240 . The individual could consume his
income plus all of the capital stock that generated it right now
if he/she is prepared to have no consumption in the future. 40
units is the constant amount our individual could consume in
perpetuity if income per unit of capital stock remains the same.
Depreciation has already been subtracted from output in order to
arrive at the figure for income.
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