Consider a perfectly competitive firm that can raise its output by 2 units by hiring an additional unit of capital.If the cost of hiring this additional unit of capital is $4 and the market price of the good is $1,the firm will certainly hire this unit of capital.[Hint: MRP = MP ´ MR]

Question

Quizplus · Accepted Answer

The firm will hire the additional unit of capital only if the marginal revenue product (MRP) is greater than or equal to the cost of capital. Here, MRP = 2 units * $1 = $2, which is less than the $4 cost, so the firm will not hire the capital.

Consider a Perfectly Competitive Firm That Can Raise Its Output