[OPE-L:4046] New Quiz!: Equalization of Profit Rates

andrew kliman (Andrew_Kliman@msn.com)
Fri, 24 Jan 1997 08:05:43 -0800 (PST)

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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.

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