IMCH15new07 - Chapter 15 Capital Chapter Summary A variety...

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Chapter 15 Capital Chapter Summary A variety of topics concerning capital and capital theory are presented here. The chapter begins with a discussion of the equilibrium quantity of capital demanded by the firm set where VMP K = r. The next section complicates the model by examining the relationship between the rental rate and the interest rate. This is followed by a discussion of the equilibrium interest rate in the market for loanable funds and real versus nominal interest rates. The middle of Chapter 15 is concerned with the market for stocks and bonds, in particular the efficient market hypothesis. This section points out clearly that according to the efficient market hypothesis, market newsletters and market research are useless. The chapter ends with a discussion of economic rent, peak load pricing, and natural resources as inputs in production. Chapter Outline Chapter Preview Financial Capital and Real Capital The Demand for Real Capital and the Relationship Between the Rental Rate and Interest Rate The Criterion for Buying a Capital Good Interest Rate Determination Real versus Nominal Interest Rates The Market for Stocks and Bonds Tax Policy and the Capital Market Economic Rent Peak Load Pricing Natural Resources as Inputs in Production Exhaustible Resource Allocation Summary Appendix: Exhaustible Resource Allocation in more detail Teaching Suggestions 1. By the time the last chapters roll around, it is hard to know who the real audience is for these comments. I presume that all those who got behind, all those who figured this was for finance class, and those who like the material in Chapters 16 and 17 better will not be reading this material. For the few who are using this chapter, I want to compliment you on being an efficient teacher with good students. I should have something profound to give you, but unfortunately I have skipped this chapter the last several semesters myself. What we should be better at in our teaching is culling the key ideas that can be highlighted in one period so that students are not shortchanged. 2. This chapter moves us from the static analysis that is so dominant in earlier material to a more dynamic framework that is highly relevant. The time value of money concepts begun in Chapter 6 can be applied to capital valuation topics. If one class was spent working through the issues that come out of the money machine story in Problem 3 of Chapter 16 in the study guide, most of the key topics of this chapter would be introduced. The problem can be complicated as much as desired by considering maintenance and depreciation implications as well as alternative tax policies. 3. Students always want to know how to make money on the stock market. The efficient market hypothesis does not hold out much hope. There is a huge amount of empirical information which indicates that money managers cannot outperform the market; in fact, managed mutual
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179 CHAPTER 15: Capital funds typically do worse than the market since managers charge a fee for managing money. A good example: Samuelson's famous dart-board portfolio; he threw darts at the
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This note was uploaded on 09/16/2011 for the course ECON/ACCOU 101 taught by Professor Jang,hajoon during the Spring '11 term at Korea University.

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IMCH15new07 - Chapter 15 Capital Chapter Summary A variety...

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