Consider that the value of the firm is as follows: 1 1 + R where R...

 

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Consider that the value of the firm is as follows: 1 1 + R where R is the risk adjusted return on stock prices (R = r + €); the expected future value of the firm is EtVt+1 = qt (Kt + It), and the adjustment costs c(It) take the following form: c(It) -In+1 with n>0. Vt = [E₁II₁ - It — c(It) + EtV₁+1] a n+1 Derive an expression for investment as a function of qt. How does the sensitivity of It to qt depend on a and n? Give a brief verbal explanation of the idea and economic mechanisms underlying the q- theory of investment. Consider that the value of the firm is as follows: 1 1 + R where R is the risk adjusted return on stock prices (R = r + €); the expected future value of the firm is EtVt+1 = qt (Kt + It), and the adjustment costs c(It) take the following form: c(It) -In+1 with n>0. Vt = [E₁II₁ - It — c(It) + EtV₁+1] a n+1 Derive an expression for investment as a function of qt. How does the sensitivity of It to qt depend on a and n? Give a brief verbal explanation of the idea and economic mechanisms underlying the q- theory of investment.

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SOLUTION To derive an expression for investment as a function of qt lets start by rearranging the firm value equation V EIIt It cIt EiVi1 1 R We can s... View the full answer