The decision rule for making an investment is to do so as long as:
A) the marginal product of capital is positive ($\Delta$Q/$\Delta$K 0).
B) the marginal product of labor is positive ($\Delta$Q/$\Delta$L 0).
C) the marginal product of capital is greater or equal to the world real interest rate ($\Delta$Q/$\Delta$K $\ge$ r*).
D) the initial level of wealth is equal to zero.

Question

The decision rule for making an investment is to do so as long as:
A) the marginal product of capital is positive ($\Delta$Q/$\Delta$K > 0).
B) the marginal product of labor is positive ($\Delta$Q/$\Delta$L > 0).
C) the marginal product of capital is greater or equal to the world real interest rate ($\Delta$Q/$\Delta$K  $\ge$ r*).
D) the initial level of wealth is equal to zero.

Quizplus · Accepted Answer

The decision rule for making an investment is to invest as long as the marginal product of capital is greater or equal to the world real interest rate. This means that the return on the investment is greater than or equal to the opportunity cost of the funds used to make the investment. Choice A is incorrect because it only considers the productivity of capital, not its cost. Choice B is incorrect because labor is not relevant for the decision to invest. Choice D is also incorrect because the initial level of wealth is not relevant for the decision to invest.

The Decision Rule for Making an Investment Is to Do Δ\DeltaΔ

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