In the year that a bakery buys a new $100,000 oven by borrowing at a real interest rate of 5 percent,the oven adds $22,000 to bread sales,depreciates by $8000,and requires $3000 in natural gas and maintenance.Since the MPK is ________ the user cost of capital,the bakery should ________.

Question

Quizplus · Accepted Answer

The Marginal Product of Capital (MPK) is $22,000, which is the additional revenue from the oven. The user cost of capital includes depreciation ($8,000), natural gas and maintenance ($3,000), and the real interest cost (5% of $100,000 = $5,000), totaling $16,000. Since the MPK ($22,000) is above the user cost of capital ($16,000), the bakery should consider buying more ovens.

In the Year That a Bakery Buys a New $100,000