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Tobin's Q: A firm produces with a production function f (Kt) = tKt The price of capital is fixed at 1 and the real interest

Tobin's Q: A firm produces with a production function f (Kt) = tKt The price of capital is fixed at 1 and the real interest rate is fixed at r. To buy capital, the firm must pay an adjustment cost 2 It2 . Capital depreciates at rate per period, so Kt+1 = (1 ) Kt + It. There is no uncertainty. There are three periods, t = 1, 2, 3, and at the end of period three the firm sells its capital and do not invest. 1

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