Question 1

For a firm that is a price taker in the product market, all of the following are true except one. Which one is the exception?

Accepted Answer

A)  Marginal revenue product can be found by multiplying price by marginal product. 
B)  Marginal revenue product is the change in total revenue that results from increasing the use of a resource by one unit, other things constant. 
C)  Marginal revenue product is constant at the prevailing price. 
D)  Increased output by the firm has no impact on the price of the product. 
E)  The marginal revenue product curve declines because of diminishing marginal returns. 
A)  Marginal revenue product can be found by multiplying price by marginal product. 
B)  Marginal revenue product is the change in total revenue that results from increasing the use of a resource by one unit, other things constant. 
C)  Marginal revenue product is constant at the prevailing price. 
D)  Increased output by the firm has no impact on the price of the product. 
E)  The marginal revenue product curve declines because of diminishing marginal returns. C

Question 2

You expect to rent out a vacation home on Sanibel Island for $800 a month as an investment. Upkeep is estimated at $3,000 a year. If the current market interest rate is 5 percent, you are willing to pay __________ for the house.

Accepted Answer

A)  $132,000 
B)  $100,000 
C)  $160,000 
D)  $192,000 
E)  $800,000 
A)  $132,000 
B)  $100,000 
C)  $160,000 
D)  $192,000 
E)  $800,000 A

Question 3

If 900 million shares of stock are traded on the New York Stock Exchange today at an average price of $100, then the total amount of money raised today by the corporations whose stock traded on this exchange would be $90 billion.

Accepted Answer

A) True 
 B)False  False

Question 4

The market interest rate

Accepted Answer

A)  typically increases from one year to the next 
B)  represents the demand for investment 
C)  represents the opportunity cost of funds 
D)  represents the supply of loanable funds 
E)  is not affected by the demand for investment 
A)  typically increases from one year to the next 
B)  represents the demand for investment 
C)  represents the opportunity cost of funds 
D)  represents the supply of loanable funds 
E)  is not affected by the demand for investment

Question 5

There is an inverse relationship between the present value of a future amount and the interest rate used for discounting.

Accepted Answer

A) True 
 B)False

Question 6

NARRBEGIN: Exhibit 13-6
Exhibit 13-6
  
-In Exhibit 13-6, assume that sewing machines last indefinitely, operating expenses are negligible and output is expected to be constant in the future. If sewing machines can be purchased for $720 each and the market interest rate is 10%, how many sewing machines should the firm purchase?

Accepted Answer

A)  one 
B)  two 
C)  three 
D)  four 
E)  five 
A)  one 
B)  two 
C)  three 
D)  four 
E)  five

Question 7

Financial intermediaries bring suppliers and demanders together in the market for

Accepted Answer

A)  checks 
B)  loanable funds 
C)  saving 
D)  physical capital 
E)  income 
A)  checks 
B)  loanable funds 
C)  saving 
D)  physical capital 
E)  income

Question 8

If a firm can borrow or lend at a 10 percent annual interest rate, it will

Accepted Answer

A)  buy all units of capital with a marginal rate of return above 10 percent 
B)  buy all units of capital with an average rate of return above 10 percent 
C)  buy all units of capital with a marginal rate of return below 10 percent 
D)  buy all units of capital with an average rate of return below 10 percent 
E)  select only the unit of capital with the highest marginal rate of return, assuming it is above 10 percent 
A)  buy all units of capital with a marginal rate of return above 10 percent 
B)  buy all units of capital with an average rate of return above 10 percent 
C)  buy all units of capital with a marginal rate of return below 10 percent 
D)  buy all units of capital with an average rate of return below 10 percent 
E)  select only the unit of capital with the highest marginal rate of return, assuming it is above 10 percent

Question 9

If the interest rate is 8 percent, $54 next year is worth __________ today.

Accepted Answer

A)  $62 
B)  $50.68 
C)  $50 
D)  $62. 
E)  $4.32 
A)  $62 
B)  $50.68 
C)  $50 
D)  $62. 
E)  $4.32

Question 10

NARRBEGIN: Exhibit 13-5
Exhibit 13-5
  
-Exhibit 13-5 shows data on the various dough-mixing machines that a donut shop is considering buying. Assume that any dough-mixing machine is expected to last indefinitely, that operating expenses are negligible, and that the price of donuts is expected to remain constant in the future. If the interest rate is 8 percent and the firm has $3,000 on hand, what should it do?

Accepted Answer

A)  Buy the machine with the three-quart bowl, which costs $3,000. 
B)  Save $3,000 at the interest rate of 8 percent. 
C)  Buy the machine with the one-quart bowl and save the extra $2,000. 
D)  Buy the machine with the two-quart bowl and save the extra $1,000. 
E)  Buy two machines, with one-quart and two-quart bowls. 
A)  Buy the machine with the three-quart bowl, which costs $3,000. 
B)  Save $3,000 at the interest rate of 8 percent. 
C)  Buy the machine with the one-quart bowl and save the extra $2,000. 
D)  Buy the machine with the two-quart bowl and save the extra $1,000. 
E)  Buy two machines, with one-quart and two-quart bowls.

Question 11

The patent and copyright systems

Accepted Answer

A)  reduce the cost of duplicating intellectual property 
B)  help make the market for intellectual property more competitive 
C)  are forms of intellectual property 
D)  help increase the incentives to create new intellectual property 
E)  help reduce the incentives to create new intellectual property 
A)  reduce the cost of duplicating intellectual property 
B)  help make the market for intellectual property more competitive 
C)  are forms of intellectual property 
D)  help increase the incentives to create new intellectual property 
E)  help reduce the incentives to create new intellectual property

Question 12

Which of the following would cause a fall in the market interest rate?

Accepted Answer

A)  an increase in the risk cost of investment 
B)  an increase in the inflation rate 
C)  an increase in the marginal rate of return on investment 
D)  a decrease in the marginal product of capital 
E)  none of the above 
A)  an increase in the risk cost of investment 
B)  an increase in the inflation rate 
C)  an increase in the marginal rate of return on investment 
D)  a decrease in the marginal product of capital 
E)  none of the above

Question 13

If the discount rate is 5 percent, the present value of annual $100,000 payments in perpetuity (i.e., continued indefinitely into the future) is

Accepted Answer

A)  $2,000,000 
B)  $1,246,296 
C)  $1,000,000 
D)  $976,463 
E)  infinite 
A)  $2,000,000 
B)  $1,246,296 
C)  $1,000,000 
D)  $976,463 
E)  infinite

Question 14

If a person produces capital goods, she sacrifices current production of consumer goods in order to obtain the capability of producing more goods and services in the future. This is called roundabout production.

Accepted Answer

A) True 
 B)False

Question 15

The reward offered to households to refrain from spending their income on current consumption and instead save their income is

Accepted Answer

A)  rent 
B)  credit 
C)  utility 
D)  interest 
E)  forgone utility 
A)  rent 
B)  credit 
C)  utility 
D)  interest 
E)  forgone utility

Question 16

Compared to the present value of a high school education, the present value of at least a college education is

Accepted Answer

A)  100 times as great 
B)  nearly double 
C)  the same 
D)  about half 
E)  Present value cannot be used to analyze education 
A)  100 times as great 
B)  nearly double 
C)  the same 
D)  about half 
E)  Present value cannot be used to analyze education

Question 17

As defined by economists, interest is

Accepted Answer

A)  only the amount earned by productive capital as a resource 
B)  only the amount earned by land as a resource 
C)  only the amount earned by lending money 
D)  both the amount earned by productive capital as a resource and the amount earned by lending money 
E)  both the amount earned by land as a resource and the amount earned by lending money 
A)  only the amount earned by productive capital as a resource 
B)  only the amount earned by land as a resource 
C)  only the amount earned by lending money 
D)  both the amount earned by productive capital as a resource and the amount earned by lending money 
E)  both the amount earned by land as a resource and the amount earned by lending money

Question 18

Suppose an investment will yield $1,000 after one year and $2,000 after two years. What is the present value of this investment if the discount rate is 8 percent?

Accepted Answer

A)  $2,479.34 
B)  $2,640.60 
C)  $2,727.27 
D)  $3,000 
E)  $3,520 
A)  $2,479.34 
B)  $2,640.60 
C)  $2,727.27 
D)  $3,000 
E)  $3,520

Question 19

If the annual interest rate is 5 percent,

Accepted Answer

A)  $100 saved today will be worth $105 after one year 
B)  $90 saved today will be worth $100 after one year 
C)  $100 saved today will be worth $5 after one year 
D)  $99 saved today will be worth $100 after one year 
E)  $100 saved today will be worth $1,000 after one year 
A)  $100 saved today will be worth $105 after one year 
B)  $90 saved today will be worth $100 after one year 
C)  $100 saved today will be worth $5 after one year 
D)  $99 saved today will be worth $100 after one year 
E)  $100 saved today will be worth $1,000 after one year

Question 20

If financial intermediaries charge a higher rate of interest to lenders than they pay to borrowers, then

Accepted Answer

A)  investing with borrowed funds involves a higher opportunity cost than investing with savings 
B)  investing with saving involves a higher opportunity cost than investing with borrowed funds 
C)  a firm is charged less interest to borrow than it can earn on savings 
D)  the opportunity cost of investing with borrowed funds equals the opportunity cost of investing with savings 
E)  a firm does not consider the market rate of interest when it makes investment decisions 
A)  investing with borrowed funds involves a higher opportunity cost than investing with savings 
B)  investing with saving involves a higher opportunity cost than investing with borrowed funds 
C)  a firm is charged less interest to borrow than it can earn on savings 
D)  the opportunity cost of investing with borrowed funds equals the opportunity cost of investing with savings 
E)  a firm does not consider the market rate of interest when it makes investment decisions

Exam 13: Capital, Interest, and Corporate Finance

For a firm that is a price taker in the product market, all of the following are true except one. Which one is the exception?

You expect to rent out a vacation home on Sanibel Island for $800 a month as an investment. Upkeep is estimated at $3,000 a year. If the current market interest rate is 5 percent, you are willing to pay __________ for the house.

If 900 million shares of stock are traded on the New York Stock Exchange today at an average price of $100, then the total amount of money raised today by the corporations whose stock traded on this exchange would be $90 billion.

The market interest rate

There is an inverse relationship between the present value of a future amount and the interest rate used for discounting.

Financial intermediaries bring suppliers and demanders together in the market for

If a firm can borrow or lend at a 10 percent annual interest rate, it will

If the interest rate is 8 percent, $54 next year is worth __________ today.

The patent and copyright systems

Which of the following would cause a fall in the market interest rate?

If the discount rate is 5 percent, the present value of annual $100,000 payments in perpetuity (i.e., continued indefinitely into the future) is

If a person produces capital goods, she sacrifices current production of consumer goods in order to obtain the capability of producing more goods and services in the future. This is called roundabout production.

The reward offered to households to refrain from spending their income on current consumption and instead save their income is

Compared to the present value of a high school education, the present value of at least a college education is

As defined by economists, interest is

Suppose an investment will yield $1,000 after one year and $2,000 after two years. What is the present value of this investment if the discount rate is 8 percent?

If the annual interest rate is 5 percent,

If financial intermediaries charge a higher rate of interest to lenders than they pay to borrowers, then

The Art and Science of Economic Analysis

Appendix: Understanding Graphs

Economic Tools and Economics Systems

Economic Decision Makers

Demand, Supply, and Markets

Elasticity of Demand and Supply

Consumer Choice and Demand

Production and Cost in the Firm

A: Perfect Competition

B: Perfect Competition

A: Monopoly

B: Monopoly

Monopolistic Competition and Oligopoly

Resource Markets

Labor Markets and Labor Unions

Transaction Costs, Imperfect Information, and Behavioral Economics

Economic Regulation and Antitrust Policy

Public Goods and Public Choice

Externalities and the Environment

Income Distribution and Poverty

International Trade

International Finance

Economic Development

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