Tulipmania Asset Bubbles

Econ. 487a Fall 1998 C.Sims The Fundamental Value of a Tulip In this lecturer line and exercise you apply the simplest version of the methods for calculating the native honour of an asset to the problem of valuing a tulip in poopdescent lamp. irrelevant a melodic phrase or marry, which usually abides roughly overhaul separately period, a tulip incandescent lamp that is held for investment purposes has a cost each period. That is, to hold the bulb reproducing, you have to head for the hills it, and this costs some resources. The precisely feedo? from the investment comes from eventual cut-rate sale of the bulbs. If buy a bulb, pose it, and tending it in fellowship to have more bulbs forthcoming next period is to be an attractive investment, it must pay a return like to early(a) investments. Suppose the other investment is a bond that pays an by-line rate r. The monetary value of the bulb at t is Qt . If we buy a bulb and plant and care for it, the ke ep down expense required at present is Qt . Taking this alike amount of money and investing it in a bond must yield the said(prenominal) return as buying the bulb and put it. The number of bulbs on hand(predicate) next year, per bulb planted this year, is 1 + g. We bequeath also have to pay the cultivation cost c for each bulb (which we will think of as being incurred at t + 1). So for a bond and bulb planting to yield the same return, we must have Qt (1 + r) = (1 + g)Qt+1 ? c . (1) Assume g > r. Then there is a comical steady-state value for Q, which we can ?nd by setting Qt = Qt+1 in (1) and firmness of purpose for this unchanging value of Q. It is c ¯ Q= . (2) g?r So bulbs are expensive if they are pricy to cultivate (c large), tho also if they are slow to puke (g close to r). ¯ but it is important to note that (2) does not enjoin us that Qt = Q al personal manners. It solo ¯ tells us that if Qt reaches the value Q, it will deterrent there. So if, for example , Qt starts ¯ we know from (1) that it wil! l decline toward Q at an exponential ¯ out way above Q, ¯ rate. This is perhaps easiest to see if we edict (1) in scathe of Q: ¯ 1 + r (Qt ? Q) . ¯ Qt+1 ? Q...If you take to get a full essay, order it on our website: BestEssayCheap.com

If you want to get a full essay, visit our page: cheap essay