Question

For every firm, the MEC schedule is a stair-like curve while the aggregate MEC schedule is a downward sloping curve.

Short answer

Answer: The MEC schedule for individual firms is stair-like due to discrete investment opportunities and diminishing marginal returns, while the aggregate MEC schedule is downward sloping because the MEC of new projects tends to decrease as more investment is undertaken in the economy.

Step-by-step solution

Understanding the Marginal Efficiency of Capital (MEC)

The Marginal Efficiency of Capital (MEC) is a concept in economics that refers to the rate of return on an additional unit of capital invested by a firm. In other words, it measures the profitability of investing in one more unit of capital. The MEC schedule is a graphical representation of the relationship between the MEC and the quantity of capital employed. It helps firms make decisions about capital investment and determines their demand for capital.

MEC schedule for an individual firm: stair-like curve

The MEC schedule for an individual firm is usually a stair-like curve. The reason for this is that firms typically face discrete investment opportunities, i.e., they can invest in projects of varying sizes and with different rates of return. Each "step" in the stair-like curve represents such an investment opportunity. As the firm invests in more capital projects, the profitability or the return on investment for the next project tends to decrease. This is due to diminishing marginal returns, which means that as more capital is employed, the added benefit from each additional unit invested tends to decline.

Aggregate MEC schedule: downward sloping curve

Now, let's consider the MEC schedule at the aggregate level, which combines the MEC schedules of all firms in the economy. In this case, the aggregate MEC schedule is a downward sloping curve. This is because the most profitable investment opportunities are pursued first by firms, meaning there is a higher MEC at lower levels of aggregate investment. As more investment is undertaken, new projects that are less profitable than the earlier ones are pursued, leading to lower MEC at higher levels of aggregate investment. In conclusion, the MEC schedule is stair-like for individual firms due to discrete investment opportunities and diminishing marginal returns. At the aggregate level, the MEC schedule is downward sloping because the MEC of new projects tends to decrease as more investment is undertaken. This combination of individual MEC schedules ultimately results in the overall downward sloping aggregate MEC schedule.