A firm chooses its profit-maximizing quantity of capital by
A)comparing the marginal revenue product of capital with the rental price of capital.
B)comparing the price of capital with the price of labor.
C)examining the total cost of capital equipment.
D)determining the rate at which the firm can borrow funds to purchase plant and equipment.

Question

Quizplus · Accepted Answer

The profit-maximizing quantity of capital is determined by comparing the marginal revenue product of capital (the additional revenue generated by one more unit of capital) with the rental price of capital (the cost of renting or purchasing an additional unit of capital). The firm should continue to add capital until the marginal revenue product of capital equals the rental price of capital, at which point the firm has reached its profit-maximizing quantity of capital.

A Firm Chooses Its Profit-Maximizing Quantity of Capital by