The firm in the table below produces denim jeans and each unit of capital represents one sewing machine. The MRP for each of machines 10 through 14 is provided. Each sewing machine delivers a stream of MRPs beginning one year from now, for a total of 2 years. Suppose that after 2 years each sewing machine is worth nothing. $$\begin{array}{l}
\begin{array} { | l | l | }
\hline \text { Number of } & \text { Annual MRP } \
\text { Sew ing Machines } & \
\hline 10 & \$ 2000 \
\hline 11 & \$ 1800 \
\hline 12 & \$ 1600 \
\hline 13 & \$ 1400 \
\hline 14 & \$ 1200 \
\hline
\end{array}\
\text { TABLE 15- } 2
\end{array}$$
-Refer to Table 15- 2. Suppose the interest rate is 4%, the purchase price of a sewing machine is
$3000, and the firm is holding its optimal capital stock. If the interest rate rises to 7%, how will this firm adjust its capital stock?

Question

The firm in the table below produces denim jeans and each unit of capital represents one sewing machine. The MRP for each of machines 10 through 14 is provided. Each sewing machine delivers a stream of MRPs beginning one year from now, for a total of 2 years. Suppose that after 2 years each sewing machine is worth nothing. $$\begin{array}{l}
\begin{array} { | l | l | } 
\hline \text { Number of } & \text { Annual MRP } \
\text { Sew ing Machines } & \
\hline 10 & \$ 2000 \
\hline 11 & \$ 1800 \
\hline 12 & \$ 1600 \
\hline 13 & \$ 1400 \
\hline 14 & \$ 1200 \
\hline
\end{array}\
\text { TABLE 15- } 2
\end{array}$$
-Refer to Table 15- 2. Suppose the interest rate is 4%, the purchase price of a sewing machine is
$3000, and the firm is holding its optimal capital stock. If the interest rate rises to 7%, how will this firm adjust its capital stock?

Quizplus · Accepted Answer

When the interest rate rises, the cost of capital increases, making it less profitable to hold as many machines. The firm will reduce its capital stock to maintain optimal profitability.

The Firm in the Table Below Produces Denim Jeans and Each