If the real rental price of capital is $10,000 per unit and the real cost of capital is $9,000 per unit, to maximize profits a firm should:
A) add to its capital stock.
B) let its capital stock shrink.
C) keep its capital stock unchanged.
D) reduce the real rental price of capital.

Question

Quizplus · Accepted Answer

When the real rental price of capital is higher than the real cost of capital, it is profitable for a firm to add to its capital stock. This is because the marginal product of capital will be greater than its rental cost, thus increasing profits. Therefore, the best choice in this scenario is choice A.

If the Real Rental Price of Capital Is $10,000 Per