A reduction in which of the following variables will cause a reduction in the user cost of capital?
A)δ
B)Πt
C)Πᵉt
D)all of the above
E) none of the above

Question

Quizplus · Accepted Answer

The user cost of capital incorporates various variables such as the interest rate, depreciation rate (δ), expected rate of inflation (Πᵉt), and expected rate of return (Πt). A reduction in the depreciation rate (δ) would imply that the capital asset will retain its value for longer periods, hence decreasing the risk of holding it. This, in turn, would reduce the user cost of capital. Therefore, option A is the correct choice.

A Reduction in Which of the Following Variables Will Cause