Consider the following statements regarding Tobin's q Theory of Investment : (A) Investment in a firm…
Tobin's \(q\) is the ratio of the market value of installed capital to its replacement cost. When \(q > 1\), the market values capital at more than it costs to replace,…
Choose your answer
Consider the following statements regarding Tobin's q Theory of Investment :
(A) Investment in a firm is expected to be higher in the future when the value of q ratio is larger than 1.
(B) It induces firms to undertake net investment even when q ratio is less than 1 in the present.
Answer and explanation
Correct answer A
Tobin's is the ratio of the market value of installed capital to its replacement cost. When , the market values capital at more than it costs to replace, which encourages firms to undertake positive net investment, making statement (A) correct. When , the market value of capital is below its replacement cost, so firms do not undertake net investment to expand capacity, making statement (B) incorrect.
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RPSC Assistant Professor (College Education)