Frank Banks manufactures and sells piggy banks in a perfectly competitive market. The firm recently purchased new equipment with an expected rate of return of 7 percent
If the market rate of interest is 8 percent, was the firm's decision to purchase the equipment a wise one? Explain.
No. A perfectly competitive firm should keep investing in capital up to the point where the expected rate of return is equal to the interest rate. In this case, the interest rate is higher. This implies that the opportunity cost of the funds used to purchase the equipment is greater than the expected revenues from the equipment. Thus, it was a bad decision.
You might also like to view...
Suppose the demand curve for a product is vertical and the supply curve is upward sloping. If a per-unit tax is imposed in the market for this product
A) buyers share the burden of the tax with government. B) the tax burden will be shared equally between buyers and sellers. C) sellers bear the entire burden of the tax. D) buyers bear the entire burden of the tax.
A firm that minimizes average cost will not survive in the long run
a. True b. False
If the economy's real GDP doubles in 18 years, we can:
A. not say anything about the average annual rate of growth. B. conclude that its average annual rate of growth is about 5.5 percent. C. conclude that its average annual rate of growth is about 2.4 percent. D. conclude that its average annual rate of growth is about 3.9 percent.
The branch of economics which studies how households and firms make choices, interact in markets, and how government attempts to influence their choices is called
A) macroeconomics. B) microeconomics. C) positive economics. D) normative economics.