For the profit-maximizing firm, if the real interest rate is greater than the marginal product of capital, the firm should:
A) invest in more capital.
B) get rid of some capital.
C) keep its capital stock the same, as there is a risk premium attached to the real interest rate.
D) hire more workers.
E) buy stocks.

Question

Quizplus · Accepted Answer

If the real interest rate is greater than the marginal product of capital, it means the firm can earn more by investing its funds at the real interest rate rather than investing in more capital. Therefore, it should reduce its capital stock to maximize profits.

For the Profit-Maximizing Firm, If the Real Interest Rate Is