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Which of the following statements is incorrect about misallocation of capital across firms? If there is...

  1. Which of the following statements is incorrect about misallocation of capital across firms?
  1. If there is no misallocation, the marginal product of capital should be increasing with firm-level productivity.
  2. If there is no misallocation, the marginal product of capital should equalize across firms.
  3. Policy that imposes a higher tax rate on larger firms can lead to misallocation of capital.
  4. Policy that imposes a lower tax rate on larger firms can lead to misallocation of capital.
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Answer #2

Policy that imposes a lower tax rate on larger firms can can lead to misallocation of capital.

( Lower tax rate would increase the amount funds available to a firm. A firm will be able to choose the production technique it wants even though use of it will be costly. Tax compliance will be there. Efficiency losses won't be there. Capital will be allocated in a more efficient manner. Thus, lower tax rate won't lead to missal location of capital. Higher tax rate leads to mis allocation of capital.)

answered by: anonymous
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