The real cost of capital is the:
A) purchase price of a unit of capital divided by the price level.
B) purchase price of a unit of capital minus the rate of inflation.
C) cost of a unit of capital less the marginal product of capital.
D) cost of buying and renting out a unit of capital measured in units of the economy's output.

Question

Quizplus · Accepted Answer

The cost of capital is typically measured as the cost of buying or renting out a unit of capital, such as a factory or a machine. This cost is typically measured in units of the economy's output, such as dollars, euros, or yen. It is important to adjust for inflation when calculating the cost of capital, but simply subtracting the rate of inflation from the purchase price (choice B) is not sufficient. The real cost of capital also takes into account the marginal product of capital, which is the additional output that can be produced by using one more unit of capital. However, choice C does not include the purchase price or rental cost of the capital unit, so it is incomplete. Therefore, the best choice is D.

The Real Cost of Capital Is The