A firm chooses its profit-maximising 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 labour.
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-maximising quantity of capital is derived by comparing the marginal revenue product of capital (MRPK) with the rental price of capital. MRPK is the additional revenue a firm can generate by adding an extra unit of capital. If the MRPK is higher than the rental price, the firm should hire more capital until MRPK equals the rental price. This ensures that the last unit of capital added contributes as much to revenue as it costs, resulting in profit maximisation.

A Firm Chooses Its Profit-Maximising Quantity of Capital by