Intermediate Microeconomics and Its Application 12th Edition by Walter Nicholson,Christopher Snyder

Exercise 24

P. T. Blowhard is the CEO of Ditch Industries. He was heard to make the following statement about his choice of inputs for digging ditches: ''We borrowed $100,000 to buy this DitchWitch, and we're still paying $8,000 per year in interest on that loan even though the machine is now essentially worthless to any other firm. We could save money by borrowing $70,000 to buy a new DitchKing machine that would do the same job with only $5,600 in interest.'' What do you make of this argument? Assuming the machines are perfect substitutes, costs would be minimized by using the one with the lower rental rate. Which one has the lower rental rate?