Sample Essay – Cost of capital
The cost of capital is measured in terms of interest rate. In a situation where the interest rate is high, the cost of capital will also be high, making capital very expensive. For example, if the interest rate rises from 10% to 20%, this means that for every $1000 borrowed, the borrower will have to pay $200 instead of the initial $100 when the economy is stable. The marginal propensity to consume is usually equal to or less than one.
When the economy is stable, the marginal propensity is less than one. Still, when the economy is poor, the MPC is approximately one, meaning that the consumer consumes most of his/ her income.
The MPS decreases when it approaches zero. A consumer does not save any portion of his/ her income. The variable costs are calculated arithmetically, and the business proprietor can observe that the variable cost increases due to the poor state of the economy.
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