The firm in the table below produces denim jeans and each unit of capital represents one sewing machine.The MRP for each of machines 10 through 14 is provided.Each sewing machine delivers a stream of MRPs beginning one year from now,for a total of 2 years.Assume that after 2 years each sewing machine is worth nothing.
TABLE 15-2
-Refer to Table 15-2.What principle will this firm follow to determine the optimal number of sewing machines to own and operate?

Question

The firm in the table below produces denim jeans and each unit of capital represents one sewing machine.The MRP for each of machines 10 through 14 is provided.Each sewing machine delivers a stream of MRPs beginning one year from now,for a total of 2 years.Assume that after 2 years each sewing machine is worth nothing.
  TABLE 15-2
-Refer to Table 15-2.What principle will this firm follow to determine the optimal number of sewing machines to own and operate?

Quizplus · Accepted Answer

This firm will follow the principle that the present value of the future MRPs on the last unit of capital should be equal to (or greater than) its purchase price. This means that the firm will only purchase an additional sewing machine if the present value of the future MRPs from that machine exceeds its purchase price. Therefore, the firm will continue to purchase sewing machines until the present value of the future MRPs of the last machine purchased is just equal to its purchase price. This ensures that the firm is maximizing its profits and not wasting resources on machines that will not generate enough revenue to justify their purchase.

The Firm in the Table Below Produces Denim Jeans and Each