Suppose that we modify the model of the firm's investment behavior by assuming that any capital the firm has remaining at the end of the period can be sold at the price p'K (in our model we assumed the capital could be sold at a price of one, in terms of consumption goods).
(a) Determine how this change affects the optimal investment rule for the firm.
(b) Suppose that we interpret p'K as the firm's stock price. If p'K increases, what effect does this have on the firm's optimal investment schedule? What does this imply about the relationship between investment expenditures and stock prices?

  • CreatedDecember 05, 2014
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