A firm should make an investment if the expected return is ...

[Jkov05]

A firm should make an investment if the expected return is greater than
 
  A) the marginal cost of the investment.
  B) the fixed cost of the investment.
  C) the opportunity cost of the investment.
  D) the expected rate of inflation.

Question 2

You sign a contract to pay 1000 next year for the refrigerator you bought today. The rate of inflation is 10 and the real interest rate is 7. Alternatively, you could pay 875 today. What should you do to save the most money?
 
  What will be an ideal response?

[Swizqar]

Answer to Question 1

C

Answer to Question 2

1000/(1 + .1 )  (1 + .07) = 849.60. This is the real present value of the 1000 payment next year. Thus, you should pay next year and not today in order to save the most money.