[OPE-L:4152] Re: New Quiz and New New Quiz!

Allin Cottrel (cottrell@wfu.edu)
Wed, 5 Feb 1997 08:50:18 -0800 (PST)

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On Wed, 5 Feb 1997 aramos@aramos.bo wrote:

> You say:
> "In Andrews setup were not told anything about
> changes in the prices of means of production."
> That is right. Andrew didnt assume anything about this. But, how can
> changes in the prices of the means of production affect the
> calculation of the rate of profit obtained by Mr Wolf?

My point was just that since we're not told anything about
changes in the price of means of production (unless that's
supposed to be implicit, as in Rieu's reading?), I don't see
how one can use the example to distinguish between
replacement-cost and other measures of profitability or
anything else.

My own question would be this: Suppose we have two
investment opportunities A and B, and let the expected rate
of profit (= expected gross income at the end of the period
minus cost incurred now, divided by cost incurred now) be
the same for both. But also suppose that the price of the
means of production used in A is expected to fall, while the
price of the means of production employed in B is expected
to remain constant. Does this give a capitalist any reason
to prefer investment in A over B or vice versa?

My thinking is that A will be preferred, if the capitalist
is thinking of investment in each of the possible ventures
as a "going concern", since A offers a prospective gain in
the form of a "release of fixed capital" while B does not.
The capitalist investing in A can use the "saving" -- owing
to his ability to replace the means of production more
cheaply -- either for consumption, or to extend the scale of
his operations.

Allin Cottrell
Department of Economics
Wake Forest University