Investment in physical capital is most likely to occur as a result of an increase in which of the following?

• A. expected future profitability
• B. the supply of unskilled labor
• C. government regulation
• D. the price of raw materials

Answer: (A)

Verified step by step guidance

1. Understand the concept of investment in physical capital: it refers to firms spending on machinery, buildings, and equipment to increase production capacity.
2. Recognize that investment decisions depend on expected returns; firms invest more when they anticipate higher future profits from using the capital.
3. Analyze each option: an increase in the supply of unskilled labor might affect labor costs but does not directly increase investment incentives.
4. Government regulation often imposes costs or restrictions, which can discourage investment rather than encourage it.
5. An increase in the price of raw materials raises production costs, potentially reducing expected profitability and thus investment incentives; therefore, the key driver is an increase in expected future profitability.