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The marginal efficiency of capital declines due to several factors, including diminishing returns on investment, increased costs, and market saturation. As more capital is invested, the additional output generated by each unit of capital tends to decrease, leading to lower profitability. Additionally, if the economy faces uncertainty or rising interest rates, investors may become more cautious, further reducing the attractiveness of new capital investments. Consequently, these factors contribute to a decline in the marginal efficiency of capital over time.

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3w ago

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Difference between marginal efficiency of investment and marginal efficicency of capital?

MEC is the expected rate of return on capital and MEI is the expected rate of return on investment.


Relation between marginal efficiency of capital and marginal efficiency of investment?

MEC is the highest rate of return expected from an additional unit of capital stock over its cost. MEI is the expected rate of return from one additional unit of investmeni.


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What is the concept of marginal cost of capital?

The marginal cost of capital (MCC) is the cost of the last dollar of capital raised, essentially the cost of another unit of capital raised. As more capital is raised, the marginal cost of capital rises.


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How do you achieve allocative efficiency?

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1. Demand of commodities 2. cost of production 3. Foreign trade 4.Rate of population growth


Is it impossible for marginal profits to decline if average profits are positive?

yes it is


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Using a hurdle rate can help take the emotion out of defining capital value. This is the advantage of using the marginal cost of capital as the hurdle rate.


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Take the first-order derivative of the cost of capital function.


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How can one determine how to find allocative efficiency in a market?

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