Assume a Machine That Has a Useful Life of Only

question 30

Multiple Choice

Assume a machine that has a useful life of only one year costs $2,000.Assume, also, that net of such operating costs as power, taxes, and so forth, the additional revenue from the output of this machine is expected to be $2,300.If the firm finds it can borrow funds at an interest rate of 10 percent, the firm should

• A)not purchase the machine, because the expected rate of return exceeds the interest rate.
• B)not purchase the machine, because the interest rate exceeds the expected rate of return.
• C)purchase the machine because the expected rate of return exceeds the interest rate.
• D)purchase the machine because the interest rate exceeds the expected rate of return.

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Definitions:

Long Run

A period in economics where all inputs, including capital and labor, can be adjusted.

Perfectly Competitive

A market structure characterized by a large number of small firms, identical products, and free entry and exit, leading to price taking behavior.

Monopolistically Competitive

Refers to a market configuration in which multiple companies offer products that are alike but not exactly the same, enabling considerable distinction and a limited amount of influence over the market.

Cost Curves

Graphical representations of how the costs of producing goods or services change with varying levels of output.