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    Question

    A firm should increase investment when

    :
    A MEC < i Correct Answer Incorrect Answer
    B MEC = i Correct Answer Incorrect Answer
    C MEC > i Correct Answer Incorrect Answer
    D MEC = 1 Correct Answer Incorrect Answer
    E None of these Correct Answer Incorrect Answer

    Solution

    A firm should increase investment when Marginal efficiency of capital is greater than i. This is because the present value PV of future returns to capital needs to be higher than the cost of capital, Ck. These variables can be expressed as follows:

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