The following table shows how the present value of the future MRPs produced by each unit of capital changes as the firm's total capital stock increases.
Units of Capital PV of Future MRPs
100…………………………$10 000
101…………………………....9 000
102…………………………....8 000
103…………………………....7 000
104…………………………....6 000
105…………………………....5 000
106…………………………....4 000
107…………………………....3 000
a. Notice that the present value of the MRP declines as more capital is used. What economic principle accounts for this?
b. If a unit of capital can be purchased for $5000, how many will the firm purchase? Explain.
c. Suppose the market interest rate falls. Explain what happens to the PV of the stream of future MRPs. What happens to the firm's profit-maximizing level of capital?