When a company's depreciation is larger than its gross ...

[armygirl]

When a company's depreciation is larger than its gross investment, net investment becomes negative and the firm's capital stock decreases. Is the previous statement correct or incorrect? Explain your answer.
 
  What will be an ideal response?

Question 2

Increasing a tariff will ________ the domestic quantity consumed of the good, while ________ the domestic production of the good.
 
  A) increase; increasing
  B) increase; decreasing
  C) decrease; increasing
  D) decrease; decreasing

[mohan]

Answer to Question 1

The statement is correct. Net investment equals gross investment minus depreciation. If depreciation is larger than gross investment, net investment will be negative. Net investment is the change in the capital stock, and so the company's capital stock decreases. Essentially, because depreciation is larger than the company's gross investment, the company is not buying enough capital to replace the capital that depreciated. As a result, the total amount of the company's capital decreases.

Answer to Question 2

C

[armygirl]

Thanks for the timely response, appreciate it

[Sarahjh]

Gracias!