According to Tobin's Q theory of investment, when should a firm invest? there is increase in the price…
A, B, D and E favour investment: higher output prices and marginal product raise capital’s prospective earnings, lower depreciation raises its value, and marginal benefit…
Choose your answer
According to Tobin's Q theory of investment, when should a firm invest?
- there is increase in the price of output
- there is an increase in marginal product of capital
- there is an increase in rate of interest
- there is a decrease in rate of depreciation
- marginal benefit of investment exceeds marginal cost
Answer and explanation
Correct answer C
A, B, D and E favour investment: higher output prices and marginal product raise capital’s prospective earnings, lower depreciation raises its value, and marginal benefit above marginal cost makes an additional unit worthwhile. A higher interest rate raises the discount/user cost and depresses q, so every set containing C is rejected. These comparative statics hold other determinants fixed.
Practice for these exams
-
UGC NET Economics