Saying a firm will continue investing up to the point at which ________ is equivalent to saying that a firm will keep investing in new capital up to the point where the expected rate of return is equal to the interest rate.

Question

Quizplus · Accepted Answer

The marginal revenue product of capital is the additional revenue gained from using an additional unit of capital. If the marginal revenue product of capital is equal to the price of capital, then investing in new capital will give the firm a return that is just equal to the cost of obtaining that capital. This means that investing further would not be profitable, as the expected rate of return would be lower than the interest rate, so the firm would stop investing at this point.

Saying a Firm Will Continue Investing Up to the Point