Essay: Measurement of cost of capital

Sample Essay

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 the capital to be 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 consume is usually equal or less than one.

When the economy is stable, the marginal propensity is less than one but when the economy is poor, the MPC is approximately one, meaning that the consumer is consuming most of his/ her income. The MPS decreases when the approaching zero. Meaning that a consumer does not save any portion of his/ her income. The variable costs are calculated arithmetically and the business proprietor can observe as the variable cost increase due to the poor state of the economy.

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