The Firm in the Table Below Produces Denim Jeans and Each

question 44

Multiple Choice

The firm in the table below produces denim jeans and each unit of capital represents one sewing machine.The MRP for each of machines 10 through 14 is provided.Each sewing machine delivers a stream of MRPs beginning one year from now,for a total of 2 years.Assume that after 2 years each sewing machine is worth nothing.
TABLE 15-2
-Refer to Table 15-2.Suppose the interest rate is 4%,the purchase price of a sewing machine is $3000,and the firm is holding its optimal capital stock.If the interest rate rises to 7%,how will this firm adjust its capital stock?

• A)it will reduce its number of machines from 12 to 11
• B)it will reduce its number of machines from 14 to 13
• C)it will not change its capital stock
• D)it will increase its number of machines from 11 to 12
• E)it will increase its number of machines from 13 to 14

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Definitions:

Equipment

Tangible assets used in operations, such as machinery or office equipment, not intended for sale.

Land

A real estate asset representing a parcel of earth's surface, its resources, and all its permanent fixtures.

Net Sales

Total sales revenue minus returns, discounts, and allowances for goods that are damaged or missing, defining a company's net sales.

Gross Profit

The financial gain obtained after subtracting the cost of goods sold from total sales revenue.