Demand and Supply in Factor Markets - LOS e ～ equipment, capital, process, whether, should

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1.The decision whether to add capital equipment to the production process should be based on:

A)  future value, using the cost of financial capital as a benchmark.

B)  present value, using the marginal revenue product of capital as a benchmark.

C)  future value, using the marginal revenue product of capital as a benchmark.

D)  present value, using the cost of financial capital as a benchmark.

2．A firm should continue adding to its capital until the marginal product of capital is:

A)  equal to the marginal revenue product of labor.

B)  greater than the cost of capital.

C)  less than the cost of capital.

D)  equal to the cost of capital.

3．One of the key differences between the decisions to add labor or capital to the production process is that the returns to labor:

A)  are relatively immediate, but those to capital may be years into the future so they must be evaluated as future values.

B)  must be projected into the future and evaluated as present values, while returns to capital can be evaluated immediately based upon market interest rates.

C)  are relatively immediate, but those to capital may be years into the future so they must be evaluated as present values.

D)  must be projected into the future and evaluated as future values, while returns to capital can be evaluated immediately based upon market interest rates.

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答案和详解如下：

1.The decision whether to add capital equipment to the production process should be based on:

A)  future value, using the cost of financial capital as a benchmark.

B)  present value, using the marginal revenue product of capital as a benchmark.

C)  future value, using the marginal revenue product of capital as a benchmark.

D)  present value, using the cost of financial capital as a benchmark.

The correct answer was D)

The marginal revenue product of capital is the prospective gain from adding capital to the production process. Since these gains occur many years into the future, they must be discounted at the cost of financial capital to obtain a present value. It is this present value that is compared with the cost of the project to determine whether or not the project should be accepted.

2．A firm should continue adding to its capital until the marginal product of capital is:

A)  equal to the marginal revenue product of labor.

B)  greater than the cost of capital.

C)  less than the cost of capital.

D)  equal to the cost of capital.

The correct answer was D)

A firm should continue to accept capital projects until the marginal revenue product of capital (the value added) is equal to the cost of capital. Prior to this point, the firm gains from each unit of capital added.

3．One of the key differences between the decisions to add labor or capital to the production process is that the returns to labor:

A)  are relatively immediate, but those to capital may be years into the future so they must be evaluated as future values.

B)  must be projected into the future and evaluated as present values, while returns to capital can be evaluated immediately based upon market interest rates.

C)  are relatively immediate, but those to capital may be years into the future so they must be evaluated as present values.

D)  must be projected into the future and evaluated as future values, while returns to capital can be evaluated immediately based upon market interest rates.

The correct answer was C)

The returns to labor are relatively immediate, and can be compared with the overall wage cost of the labor. The returns from the addition of capital occur over a span of years, so must be discounted back to today and evaluated as present values versus the cost of the capital.