Will a firm invest, if its marginal efficiency of investment is 12% and the rate of interest is 16%?

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Solution

No, the firm will not invest. The marginal efficiency of capital/investment is the expected return from an additional unit of capital employed/investment made, while, the rate of interest specifies the returns from an interest providing security. Thus, since, the firm can earn a higher return from interest, it won't undertake additional investment in capital.

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