If MPK r, the firm:
A) should hire more labor
B) should hire more capital until MPK = 0
C) should get rid of some capital until MPK = r
D) should hire more capital until MPK = r
E) has the optimal amount of capital

Question

If MPK > r, the firm:
A) should hire more labor
B) should hire more capital until MPK = 0
C) should get rid of some capital until MPK = r
D) should hire more capital until MPK = r
E) has the optimal amount of capital

Quizplus · Accepted Answer

If MPK > r, it means that the marginal product of capital is greater than the rental cost of capital. This implies that the firm can increase its profits by hiring more capital until MPK = r, where the marginal product of capital equals the rental cost of capital. Therefore, option D (hire more capital until MPK = r) is the best choice in this case.

If MPK > R, the Firm