Explain Why in the Long Run a Firm That Is

question 122

Essay

Explain why in the long run a firm that is cost minimizing will choose K and L where:
w/MP_L = r/MP_K
What does this tell you about the marginal cost of increasing output through hiring labor and the marginal cost of increasing output through adding capital?

Understand various capital investment evaluation methods and their application.

Calculate and interpret the average rate of return for investment projects.

Understand and apply the concept of the time value of money in investment decisions.

Identify and calculate the net present value (NPV) of investment proposals.

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Definitions:

Interest Rate

The proportion of a loan that is charged as interest to the borrower, typically expressed as an annual percentage.

Equilibrium Interest Rate

The interest rate at which the quantity of money demanded equals the quantity of money supplied, balancing savings and investment.

Loanable Funds

The funds available for borrowing in the financial markets, influenced by savings, government policies, and financial institutions' lending criteria.

Market

The arena in which buyers and sellers come together to trade goods, services, or financial instruments, establishing prices through supply and demand.