According to James Tobin,the long run value of Tobin's Q should tend toward

Question

Quizplus · Accepted Answer

Tobin's Q represents the market value of an asset to its replacement cost. In the long run, if Tobin's Q is greater than 1, it implies that the market value of an asset is higher than its replacement cost, indicating profit opportunities for new firms to enter the market. As a result, competition increases, which drives down the market value of assets, and Tobin's Q tends toward 1. Similarly, if Tobin's Q is less than 1, it implies that the market value of an asset is lower than its replacement cost, indicating a lack of profitability for firms in the market. Hence, firms may leave the market, reducing competition, which raises the market value of assets, and Tobin's Q tends toward 1.

According to James Tobin,the Long Run Value of Tobin's Q