A firm possesses too much capital if ________.
A)the real rental cost of capital is equal to the marginal product of capital
B)the real rental cost of capital is less than the marginal product of capital
C)its investment spending exceeds its consumption outlays
D)the real rental cost of capital is more than the marginal product of capital

Question

Quizplus · Accepted Answer

If the real rental cost of capital is more than the marginal product of capital, it means that the firm is paying more for capital than it is worth in terms of productivity. This implies that the firm has excess capital, and should reduce its investment in capital until the rental cost equals the marginal product. Hence, option D is the correct answer. Option A is incorrect because if the real rental cost of capital equals the marginal product of capital, then the firm is efficiently using its capital resources. Option B is incorrect because a lower rental cost than the marginal product of capital indicates that the firm can earn more by investing in capital. Finally, option C is not relevant to the question.

A Firm Possesses Too Much Capital If ________