Choose the correct statements in the context of the 'q' theory of investment propounded by James Tobin.…
Statements (i), (ii) and (iii) are correct ("Only (i), (ii) and (iii)"). Tobin's \(q\) theory is closely linked to the neoclassical theory of investment and defines \(q\) as…
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Choose the correct statements in the context of the 'q' theory of investment propounded by James Tobin.
(i) It is closely related to the neoclassical theory.
(ii) Tobin's 'q' ratio provides an incentive to invest for firms on the basis of the stock market.
(iii) The 'q' ratio reflects the expected future profitability from the installed capital.
(iv) If Tobin's 'q' is less than 1, the firm can buy more capital and issue additional shares in the stock market.
Answer and explanation
Correct answer C
Statements (i), (ii) and (iii) are correct ("Only (i), (ii) and (iii)"). Tobin's theory is closely linked to the neoclassical theory of investment and defines as the ratio of a firm's stock-market valuation to the replacement cost of its installed capital. Because market valuation incorporates the present value of expected future profits, reflects expected future profitability and guides investment decisions. Statement (iv) is false because firms have an incentive to issue shares and expand capital when , whereas discourages new capital investment.
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RPSC Assistant Professor (College Education)