In Exercises 11 to 14, find the slope of the line that passes through the given points. (3, f(3)) and (3 + h, f(3 + h))
Week 12 Tuesday, April 5, 2012:55 PM Neo-Classical Model of Business Investment -looks at marginal costs/benefits -looks at marginal utilities Production Firms -rents capital and uses it to produce goods and services for consumers Rental Firms -firm that buys capital and rents it out to production firms Production Firm's Problem Marginal Benefits -marginal product of capital (MPK) -how much more do we benefit from renting more capital -Price * MPK = marginal benefit from renting more capital Marginal Costs -R = rental rate of capital Firm will rent until R = P*MPK Rental Firm's Problem Marginal Benefits: -R = P*MPK Marginal Costs: δ*P =Kdepreciation on capital i*P K nominal interest -∆*P =Kcapital gain -Cost of Owning Capital = i*P -∆KP δ*P K K P (i - ∆P /P + δ) = C.O.C. k K K ∆P KP K π = inflation ratio Pk(i - π+ δ) = C.O.C. i - π = real interest rate Pk(r + δ) = C.O.C. -COC/P = P /P(r + δ) k Invest in more capital if MPK > P /Pkr + δ) Divest capital if MPK < P /k(r + δ) In long-run, MPK = P /Pkr + δ) Net Investment Function: In= [MPK - P /Pkr + δ)] Gross Investment Function: I = n [MPK - P kP(r + δ)] + δ*K If interest rate r increases, Inand I decrease (movement along IS curve) If MPK increases, I and I increase (shift to the right on IS curve) If Pk/P increases, Inand I decrease (shift to the left on IS curve) If δ increases, I decreases and change in I is ambiguous n Corporate Income Taxes and Investment -35% of firms "profits" -Define profits as P*MPK - (r + δ)P K -depreciation is hard to measure (δ*P ) K -use historical cost of capital for P Kproblematic due to inflation over the years) 4/7/16 I = I [MPK - P /P(r + δ)] + δ*K n k Tobin's Q Ratio: Q = If Q >1, firm should expand investment If Q <1, firm should disinvest Marginal product of capital (MPK) is major determinant of market value of firm's capital P /P and r + δ determine the replacement cost of firm's capital K Is the Stock Market "Efficient" 1) Efficient markets hypothesis says yes -Market price of stock is rational evaluation of the company given current -Market price of stock is rational evaluation of the company given current info about company's business prospects -financial analysts follow major companies and money is traded based on their recommendations -stock prices reflect all information available about a company -stock prices will only change due to unanticipated info about a company -prices follow a "random walk" 2) Keynes's "Beauty Contest" Hypothesis -Psychological factors can drive fluctuations in stock prices -stock prices can change for reasons other than new info about a firm May 2010: "Flash Crash" -Dow Jones started falling quickly: fell 700 points in an hour -Came back up when market opened next morning -all due to computerized algorithms that automatically sell stocks when Dow starts to fall -people realized what was happening and started buying again, so Dow rose again Residential Investment -purchases of NEW homes and apartments for private use -price of existing homes positively affects supply of new homes -housing demand tends to go up when interest rate (r) is low and vice versa Inventory Investment -Price speculation -Stock-out Avoidance -insurance against unexpectedly large orders -Production smoothing -Demand might be predictable (volatile) than the ability to change supply -Showroom effect -Having a large number/variety of goods makes it easier to satisfy consumer preferences
