Figure 9.3 combines the information in Figures 9.1 and 9.2. The diagram
shows how K and q must behave to satisfy (9.25) and (9.26) at every point
in time given their initial values. Suppose, for example, that K and q begin
at Point A. Then, since q is more than 1, firms increase their capital stocks;
thus ˙K is positive. And since K is high and profits are therefore low, q can