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The MEC and capital outlays are the elements that a firm takes into account when deciding about an investment project. The MEC needs to be higher than the rate of interest, r, for investment to take place. This is because the present value PV of future returns to capital needs to be higher than the cost of capital, C k. These variables can be ...
Solutions to the problem of this sub-model generally show that the rate of return on health capital must equal the opportunity cost of said capital. Thus, increases in the depreciation rate over time cause the optimal stock of health to decrease. If the marginal efficiency of capital curve is inelastic, gross investment grows over time.
The 'marginal efficiency of capital' is defined as the annual revenue which is expected to be yielded by an extra increment of capital as a proportion of its cost. The 'schedule of the marginal efficiency of capital' is the function which, for any rate of interest r, gives us the level of investment which will take place if all opportunities ...
The saving curves are crossed by another set, each of which represents a different schedule of the marginal efficiency of capital. (In Chapter 14 he usually refers to the schedule of the marginal efficiency of capital as the 'investment demand-schedule'.) A single such curve X 2 X 2 ' is drawn in blue on the right.
Keynes considers seven different effects of lower wages (including the marginal efficiency of capital and interest rates) and whether or not they have an impact on employment. [7] He concludes that the only one that does is interest rates. [8]
MEC tells us the cost of raising $1 of tax through the use of different types of tax. For example: if capital tax has a MEC of $0.50 then it costs the government $0.50 to collect $1 from capital taxes. Marginal efficiency cost of taxes can help policymakers to decide what to implement taxes on by pursuing taxes with a low MEC.
The horizontal blue line I (r ) is the schedule of the marginal efficiency of capital whose value is independent of Y. The schedule of the marginal efficiency of capital is dependent on the interest rate, specifically the interest rate cost of a new investment.
The Incremental Capital-Output Ratio (ICOR) is the ratio of investment to growth which is equal to the reciprocal of the marginal product of capital. The higher the ICOR, the lower the productivity of capital or the marginal efficiency of capital. The ICOR can be thought of as a measure of the inefficiency with which capital is used. In most ...