As we mentioned in Chapter 25, firms make their decisions not just with regard to the production possibilities and demand at the present period of time but rather attempt to optimize their activities over a longer time horizon. How can these firms compare profits that occur at different periods of time? Having a dollar today is surely different from having a dollar next year. In order to compare profits that accrue at different time periods, we may calculate their present value rather than their current value. In this chapter we take up the issue of present versus current value in more detail and provide the tools that are necessary for the following chapters to assess the optimal behavior of firms over time.
KeywordsInterest Rate Discount Rate Production Possibility Initial Endowment Optimal Behavior
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