marginal efficiency of investment

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The highest interest rate at which a project could be expected to break even. This depends on the immediate profits expected from operating the project, and the rate at which these are expected to decline through reductions in the real price of the output, or increases in real wages and fuel and materials costs. If all possible projects in an economy are arranged in descending order of their MEI, theory suggests that investors will proceed with those with an MEI higher than the interest rate plus an appropriate risk premium, and reject those with an MEI lower than this.

Subjects: Economics.

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