If R is the real interest rate, w is the real wage, MPK is the marginal product of capital, and MPL is the marginal product of labor, which of the following conditions informs the profit-maximizing firm how much capital to invest?
A) R = MPK
B) R = w
C) R = 0 and MPK= MPL
D) MPK = MPL
E) MPK $\gt$ MPL if R $\lt$ w

Question

If R is the real interest rate, w is the real wage, MPK is the marginal product of capital, and MPL is the marginal product of labor, which of the following conditions informs the profit-maximizing firm how much capital to invest?
A) R = MPK
B) R = w
C) R = 0 and MPK= MPL
D) MPK = MPL
E) MPK  $\gt$ MPL if R $\lt$ w

Quizplus · Accepted Answer

A profit-maximizing firm will invest in capital up to the point where the real interest rate (R) equals the marginal product of capital (MPK). This condition ensures that the cost of borrowing or using capital is equal to the additional revenue generated by the last unit of capital invested.

If R Is the Real Interest Rate, W Is the Real