If Marginal Efficiency is 10% and the Rate of Interest is 5%, then the Investment is:

Question

Accepted Answer

The correct option is 1:

The decision to invest in any project, according to Keynesian economics, hinges on the comparison between the Marginal Efficiency of Capital (MEC) and the prevailing Rate of Interest (r). The MEC represents the expected rate of return (profitability) from an investment project over its lifetime, while the Rate of Interest represents the cost of borrowing the funds needed for that investment. The core investment criterion states that an investment will be undertaken if and only if the expected rate of return (MEC) is greater than or equal to the cost of borrowing (r). In this question, the Marginal Efficiency (MEC) is 10% and the Rate of Interest (r) is 5%. Since MEC (10%) > r (5%), the expected earnings from the capital asset exceed the cost of financing it, making the investment highly attractive and, therefore, profitable.

The incorrect option is 2: Unprofitable

An investment is considered unprofitable if the Marginal Efficiency of Capital (MEC) is less than the Rate of Interest (r). Since 10% (MEC) is greater than 5% (r), the project is expected to generate a surplus over its cost, directly contradicting the definition of an unprofitable investment.

The incorrect option is 3: Independent

The term 'Independent' in investment theory does not refer to the profitability condition itself but rather to the relationship between the investment decision and other variables. The profitability of an induced investment is clearly dependent on the relationship between MEC and the rate of interest, so 'Independent' is not an appropriate description here.

The incorrect option is 4: Autonomous

Autonomous investment refers to investment that is not influenced by the level of income, output, or interest rates in the economy (e.g., government investment or technological advancements). Since the question directly provides the MEC and Rate of Interest to determine profitability, it implies an induced investment decision, making the term 'Autonomous' irrelevant to the decision rule.