What is meant by the statement that investment projects are irreversible? How does the idea that investment projects are irreversible affect the volatility of investment in capital goods?
What will be an ideal response?
By stating that investment projects are irreversible, this means that once an investment project is finished, it is hard for the firm to use the investment for another activity. Firms will therefore often take time to acquire useful information about the profitability of the project. This creates a trade-off between the benefit of committing to an investment project and receiving the profits from the project sooner and the benefit of waiting to acquire more information to be better able to pursue an investment project that may be better suited to the economic environment. The fact that investment projects are irreversible and can be delayed makes the growth rate of investment expenditures volatile.
You might also like to view...
In reality, reliable information is usually costly for both consumers and producers
Indicate whether the statement is true or false
In 1950, a phone call at a pay phone cost 5 cents and a first-class stamp cost 3 cents. Today, those prices are 50 cents and 49 cents respectively. What has happened to the price of each good relative to the other? What has happened to the price of each
good relative to all other goods? What will be an ideal response?