Two firms with identical capital intensity ratios are generating the same amount of sales.However, Firm A is operating at full capacity, while Firm B is operating below capacity.If the two firms expect the same growth in sales during the next period, then Firm A is likely to need more additional funds than Firm B, other things held constant.

Question

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Firm A, which is operating at full capacity, may need additional funds to expand its production capacity to meet the expected growth in sales. On the other hand, Firm B may be able to meet the expected growth in sales without requiring additional funds for expanding its production capacity as it is not operating at full capacity.

Two Firms with Identical Capital Intensity Ratios Are Generating the Same