Viana do Castelo
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Viana do Castelo Travel on When there is a single homogenous capital good, however, aggregate production functions can be used without apology, save one: the possibility of reswitching. It can be shown that the same technique can be profitable at two different INTEREST RATES. That is, when the interest rate changes, if technique A is initially used at interest rate r0, and technique B at a lower interest rate r¹ is used, then at the lower interest rate r², the economy reswitches to technique A. Without a unique relationship between the rate of interest and the amount of capital, the interest rate cannot be used as a determinate factor in capital demand. Separating the rate of interest from the demand for capital would destroy the theoretical construct of capital. Around 1907, Irving FISHER, in his theory of interest, avoided this problem by avoiding macroeconomic formulations. This microeconomic approach steers clear of the problems presented by a heterogeneous amount of capital goods condensed into a homogeneous globule for an aggregate production function. Viana do Castelo Travel 2016.