The Same Principle when the Options Differ by Continuous Gradations.

Out of all options, that one is selected the differences of which from its nearest rival gives a rate of return over cost equal to the market rate of interest. Such a rate is called the marginal rate of return on cost.

In whichever of these aspects it is regarded, this is the principle of investment opportunity. However he reckons it, every one measures his opportunities to invest—to Edition: current; Page: [176] modify his income stream—in reference to the rate of interest by applying this principle.

We can scarcely exaggerate the importance of the concept of "rate of return over cost" and of its special variety "marginal rate of return over cost" as an element in our analysis of the conditions determining the rate of interest. It supplies, on the physical or technical or productivity side of the analysis, what the marginal rate of time preference supplies on the psychical side. The subject is, as has been seen, one which may be looked upon from many points of view, which may seem at first to be inconsistent yet which may be thoroughly coordinated under the foregoing generalizations.