Andrew:
I'll take the "equally risky" assumption to mean that expected output and
unit cost growth rates are identical for both sectors. Accordingly, the
profit rate in sector A next year should be 9% and the expected profit rate
in sector B next year should be 9%. Hence, it doesn't matter which sector
one invests. I'd like a complementary copy of the Marx-Engels collective
works as my prize.
peace, patrick l mason
At 08:05 AM 1/24/97 -0800, you wrote:
>Many months ago, there was a discussion of equalization of profit rates on
>this list, which got cut short largely because I didn't have time to respond
>to the whole host of issues that were brought up in connection with the topic,
>particularly by Allin and Bruce. Someone else, not on the list, has recently
>raised the matter once again, which has forced me to return to it. He claims
>that replacement costs, not past actual costs, guide investment decisions.
>
>Quiz:
>Assume a two-sector economy, with circulating capital only, in which
>production takes 1 year in each sector. The profit rate in sector A next year
>will be 10%, and the profit rate in sector B will be 8%, if prices remain the
>same. However, in the past several years, the price of A's product has been
>falling by 10er year, and the price of B's product has been rising by 10er
>year. Analysts forecast that these trends will continue, and judge the two
>investments to be equally risky.
>
>All else being equal, in which sector would you invest?
>
>Andrew Kliman
>
>