Quick SS4 Q

According to the neoclassical growth theory, firms will continue to acquire additional capital until: a. The marginal product of capital is equal to the real interest rate. b. The cost of technology is equal to the real wage rate. c. The capital-to-labor ratio is equal to the nominal wage rate.



I put B as well . . . but it is A Choice “a” is correct. The neoclassical growth theory postulates that firms will invest in additional capital as long as the increases to productivity are higher than the cost of capital. When the marginal product of the last unit of additional capital is equal to the real interest rate, the gains from investment are maximized.