Exhibit 133 gives data on the number of tools a certain firm buys to use in its productionprocess.Assume that the tools are expected to last indefinitely, that operating expenses arenegligible, and that the price of the firm's output is expected to remain constant in the future.At an interest rate of 10 percent, the firm in Exhibit 133 should select

Question

Exhibit 13­3 gives data on the number of tools a certain firm buys to use in its productionprocess.Assume that the tools are expected to last indefinitely, that operating expenses arenegligible, and that the price of the firm's output is expected to remain constant in the future.At an interest rate of 10 percent, the firm in Exhibit 13­3 should select

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The firm should select the level of tools where marginal revenue equals marginal cost. In Exhibit 13-3, the marginal revenue from each additional tool is $1,000, while the marginal cost of the first tool is $1,000, the second tool is $1,800, the third tool is $2,600, the fourth tool is $3,400, and the fifth tool is $4,200. At an interest rate of 10 percent, we can discount future cash flows to the present by a factor of 1.1. Therefore, the present value of the marginal cost of each additional tool is $909 for the first tool, $1,455 for the second tool, $1,947 for the third tool, $2,471 for the fourth tool, and $3,025 for the fifth tool. Thus, the firm should select four tools, where marginal revenue of $1,000 equals the discounted marginal cost of $2,471. At this level, the firm will maximize its profit.

Exhibit 13­3 Gives Data on the Number of Tools a Certain

Exhibit 133 Gives Data on the Number of Tools a Certain