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 correct statement is that a firm will continue investing in new capital up to the point where the marginal revenue product of capital is equal to its rental cost. This is because the marginal revenue product of capital represents the additional revenue generated by the last unit of capital, and the rental cost represents the cost of using that capital. When these two are equal, it means the firm is making an investment that yields a return equal to its cost, which is analogous to the expected rate of return being equal to the interest rate.

Saying a Firm Will Continue Investing Up to the Point