Deck 12: Land, Capital Markets, and Innovation

Question 1

If the supply of land is perfectly inelastic, then an increase in rent

A) leaves the quantity of land supplied unchanged.
B) greatly increases the quantity of land supplied.
C) decreases the quantity of land supplied.
D) minimally increases the quantity of land supplied.

Answer 1

A

Question 2

When the supply curve for land is vertical

A) an increase in rent occurs if the demand for land falls.
B) an increase in rent occurs if the demand for land rises.
C) a decrease in rent occurs if the demand for land rises.
D) taxes on land cause tremendous reductions in the amount of land used.

Answer 2

B

Question 3

Land has all of these characteristics, EXCEPT it

A) can be improved.
B) has a perfectly fixed supply.
C) includes natural resources that have inelastic supply.
D) is the driver to collect rent.

Answer 3

B

Question 4

In economics, the term "land" refers to

A) only a physical area of the Earth's surface.
B) only natural resources.
C) both a physical area of the Earth's surface and natural resources.
D) neither a physical area of the Earth's surface nor its natural resources.

Question 5

The economic payment for land is called

A) interest.
B) profit.
C) rent.
D) surplus.

Question 6

Rent is the payment to owners of which factor of production?

A) physical capital
B) human capital
C) labor
D) land

Question 7

The price of land is primarily determined by shifts in

A) demand.
B) supply.
C) demand and supply.
D) factors other than demand or supply.

Question 8

The discovery of natural gas in the American Midwest should lead to a(n) ____ in the price of land because of a(n) _____ land.

A) decrease; increase in supply of
B) decrease; decrease in demand for
C) increase; decrease in supply of
D) increase; increase in demand for

Question 9

Which statement about rent is FALSE?

A) It is any return or income that flows to land as a factor of production.
B) It rises when the supply of usable land decreases.
C) It depends entirely on demand when supply is perfectly inelastic.
D) It is a payment that flows to entrepreneurs.

Question 10

Industrial agglomeration

A) describes geographical clusters of industries that choose to locate close to a resource that they all use.
B) leads to lower rents.
C) describes geographical clusters of firms within an industry that choose to locate close to one another.
D) is illegal in the United States.

Question 11

Industrial agglomeration occurs because of which economic phenomenon?

A) economies of scale
B) diminishing marginal utility
C) increasing marginal costs
D) diseconomies of scale

Question 12

The marginal product of capital curve has what type of slope?

A) a horizontal line
B) a negative slope
C) a positive slope
D) a vertical line

Question 13

The marginal revenue product of capital is equal to the marginal product of capital

A) multiplied by the product price.
B) plus the product price.
C) multiplied by the price of capital.
D) plus the price of capital.

Question 14

In economics, firms continue to invest until the marginal _____ the cost of capital.

A) revenue product of capital exceeds
B) product of capital exceeds
C) revenue product of capital equals
D) product of capital equals

Question 15

The cost of capital can be measured by

A) interest.
B) profit.
C) rent.
D) surplus.

Question 16

A firm will invest in additional capital goods as long as the

A) MRP_K exceeds the interest rate.
B) interest rate exceeds MRP_K.
C) MRP_K is greater than 0.
D) MRP_L exceeds the interest rate.

Question 17

The loanable funds market is the market

A) in which firms obtain financial resources to purchase capital goods.
B) in which firms hire labor.
C) in which education, skills, and training are obtained.
D) for which rent is the factor payment.

Question 18

In the loanable funds market, the price on the vertical axis is the

A) economic rent.
B) interest rate.
C) marginal product of capital.
D) marginal revenue product of capital.

Question 19

The supply of loanable funds is positively sloped because

A) higher interest rates lead to a lower quantity of funds supplied.
B) lower interest rates reduce the quantity of funds supplied.
C) higher interest rates lead to a lower quantity of funds demanded.
D) higher interest rates increase the demand for loanable funds.

Question 20

A firm will take on more investment projects as

A) the cost of capital rises.
B) the rate of return on projects falls.
C) interest rates fall.
D) the marginal revenue product of capital decreases.

Question 21

Present value is

A) the value of Christmas presents.
B) not changed when the interest rate changes.
C) greater for a longer time horizon.
D) lower for a longer time horizon.

Question 22

Present value and rate of return calculations

A) are too complicated for most practical applications.
B) often lead to contradictory conclusions.
C) help managers decide how much to invest.
D) help determine equilibrium interest rates.

Question 23

Present value is the

A) inverse of the interest rate.
B) reverse of the interest rate.
C) future value minus the rate of inflation.
D) value of a future amount expressed in today's dollars.

Question 24

If the discount rate _____, the present value today _____.

A) decreases; decreases
B) decreases; stays the same
C) increases; decreases
D) increases; stays the same

Question 25

According to the concept of present value, the value of $250 today is

A) less than $250 to be received in six months.
B) equal to $250 in six months.
C) equal to $250 to be received in one year.
D) more than $250 to be received in six months.

Question 26

The present value of $X, to be received n periods in the future, is equal to

A) n/(1 + X)ⁱ.
B) i/(1 + X)ⁿ.
C) n/(1 + i)^X.
D) X/(1 + i)ⁿ.

Question 27

The present value of $X, to be received n periods in the future, is equal to

A) X × (1 + i)ⁿ.
B) X × (1 + i)/n.
C) X/(1 + i)ⁿ.
D) X/(1 + i) × n.

Question 28

Suppose interest rate i is 3% per year. What is the present value of $1,400 to be received in four years?

A) $1,243.88
B) $1,244.60
C) $1,358.00
D) $1,575.71

Question 29

Another term for marginal efficiency of capital is

A) industrial agglomeration.
B) internal rate of return.
C) marginal revenue product.
D) present value.

Question 30

A worker wants to set aside some money for retirement, hoping to live off of the interest income. If the interest rate is 10% and he wishes to draw interest of $50,000 per year, how much should he save before retirement?

A) $500,000
B) $50 million
C) $1 million
D) $10 million

Question 31

Tough Luck Energy Company's internal rate of return is 12%. The interest rate for borrowing money from a bank is 6%. TLEC can invest in a wind farm and make a calculated 19% internal rate of return; or it can invest in a nuclear plant and make a calculated 10% internal rate of return. TLEC should build

A) only a wind farm.
B) only a nuclear plant.
C) both a wind farm and a nuclear plant.
D) neither a wind farm nor a nuclear plant.

Question 32

The rate of return approach

A) does not consider the present value concept.
B) is better than the present value approach.
C) determines the rate of interest when the net present value is zero.
D) does not consider the cost of capital.

Question 33

If someone offers to pay you $1,200 in three years at the going interest rate of 4%, what is the present value for this future payment?

A) $1,066.80
B) $1,109.47
C) $1,153.85
D) $3,000.00

Question 34

If someone offers to pay you $500 in year one; $1,000 in year two; $1,500 in year three; and $2,000 in year four, what is the present value of this income stream if the going interest rate is 4%?

A) $480.77
B) $1,405.33
C) $1,333.50
D) $4,448.44

Question 35

If a firm requires investments to yield 25%, what would be an acceptable rate of return for the firm's latest investment?

A) 20%
B) 15%
C) 30%
D) 24%

Question 36

The cost of capital for a new project is $55,000. The project is expected to yield $20,000 in year one and $40,000 in year two. What is the approximate rate of return over this period?

A) 5.4%
B) 10.8%
C) 2.7%
D) 7.4%

Question 37

Martin's Auto Repair Service is considering the purchase of a new piece of equipment that costs $5,000. The equipment would allow Martin's to generate additional revenue of $1,400 per year for four years. If the interest rate is 5%, what is the net present value of this investment?

A) $6,234.56
B) $5,467.67
C) $4,964.33
D) $4,359.46

Question 38

Martin's Auto Repair Service is considering the purchase of a new piece of equipment that costs $4,964. The equipment would allow Martin's to generate additional revenue of $1,400 per year for four years. At what interest rate would this investment break even?

A) 4%
B) 4.2%
C) 5%
D) 5.6%

Question 39

A firm seeks an internal rate of return of at least 9%. Would it make sense for the firm to spend $10,000 today on a piece of equipment that will allow it to bring in $5,600 of additional revenue in each of the next two years?

A) Yes, because the rate of return exceeds 9%.
B) Yes, because the rate of return is exactly the desired 9%.
C) No, because the rate of return is less than 9%.
D) It is impossible to determine with the information given.

Question 40

(Table: Data for Two Island Cities) Looking at the data for the two cities, which statement describes what can be expected?
$\begin{array}{|l|l|l|}\hline & \text { River City } & \text { Sea City } \\\hline \text { Square mile area of island } & 34 & 600 \\\hline \text { Population on island } & 1.6 \text { million } & 1 \text { million } \\\hline \text { Nearest large land mass } & 0.5 \text { miles } & 2,000 \text { miles } \\\hline\end{array}$

A) Landowners are likely to receive higher rent in Sea City than River City because the remote location is an attraction to more people, resulting in higher demand for land.
B) Landowners are likely to receive higher rent in Sea City than River City because it is less crowded, resulting in higher demand.
C) Landowners are likely to receive higher rent in River City than Sea City because the nearness to another landmass means housing is not needed in River City, resulting in low demand for land.
D) Landowners are likely to receive higher rent in River City than Sea City because the higher population and smaller land area indicate that demand for housing will be higher relative to its supply.

Question 41

A mall was built in Manila, Philippines, on coastal land that had been underwater until it was built up prior to the mall's construction. What must have been TRUE regarding rent from land in the Manila area?

A) Rent was so high that investors expected a positive rate of return after incurring the cost to increase the amount of dry land in the city.
B) The land underwater must offer higher rent than dry land.
C) There is little limitation to land available around Manila.
D) Rents are low enough for land in Manila that investors must find innovative ways to make a mall attractive to shoppers.

Question 42

A restaurant owns the land on which it is located, a small piece of property in the center of a city that has a growing population. The restaurant owner does not want to change locations, so he has put as many tables in the restaurant as possible without making customers feel crowded. The restaurant owner will

A) earn greater rent due to growing demand and limitations on supply.
B) increase the quantity of meals supplied as the demand grows, earning higher profit from the larger quantity sold.
C) face higher costs and lower rents due to the growing population around him, which will increase demand for restaurant meals.
D) earn lower rent because the return to land will fall.

Question 43

Hua Xing runs a lawn care service. Buying an additional riding lawn mower will cost $3,000 but would allow her firm to earn $1,000 of additional revenue each year for the next four years. She expects marginal efficiency of capital to be at least 10%. Which statement is an accurate description of this investment opportunity?

A) Hua Xing should make the investment because turning $3,000 into $4,000 provides a rate of return of 33%.
B) Hua Xing should not make the investment because it provides only a 5.16% return on investment.
C) Hua Xing should not make the investment because it has a negative net present value.
D) Hua Xing should make the investment because the internal rate of return exceeds 10%.

Question 44

Olaf owns a carpentry business and is considering two different types of saws, both of which would cost $1,200. Saw A would last three years and generate an additional $500 of revenue per year. Saw B would last only two years but would generate an additional $700 of revenue per year. Assuming an interest rate of 5%, which statement accurately describes Olaf's options?

A) Neither saw would be a wise investment because both saws provide a negative rate of return.
B) Saw A has a higher rate of return than Saw
C) Saw B has a higher rate of return than Sawd.
D) Both saws are equally attractive in terms of rate of return.

Question 45

Banks and other financial institutions offer small business loans based on all of these EXCEPT the

A) firm's credit history.
B) willingness of venture capitalists to fund the business.
C) potential for success of the business.
D) ability to resell collateral used to secure the loan.

Question 46

A business owner spending $15,000 to fund her operations is an example of

A) entrepreneurship.
B) financial capital.
C) human capital.
D) physical capital.

Question 47

If a bank reserves the right to repossess an automobile if the car loan is not paid, the car is serving as

A) collateral.
B) financial capital.
C) loanable funds.
D) physical capital.

Question 48

The face value of a bond is

A) a periodic fixed payment made to a bondholder expressed as a percent of its face value.
B) the amount that must be repaid to the bondholder upon its maturity.
C) the date when the face value must be paid to the bondholder.
D) the current annual return to a bond.

Question 49

A bond's yield is

A) a periodic fixed payment made to a bondholder expressed as a percent of its face value.
B) the amount that must be repaid to the bondholder upon its maturity.
C) the date when the face value must be paid to the bondholder.
D) the current annual return to a bond.

Question 50

A periodic fixed payment made to a bondholder expressed as a percent of its face value is the bond's

A) coupon rate.
B) case value.
C) maturity date.
D) yield.

Question 51

If the risk of a bond increases, then its

A) yield increases.
B) coupon rate increases.
C) face value increases.
D) coupon rate decreases.

Question 52

Bonds are BEST described as a type of

A) debt capital.
B) equity capital.
C) both debt capital and equity capital.
D) neither debt capital nor equity capital.

Question 53

The amount that must be repaid to the bondholder upon the bond's maturity is called the

A) face value.
B) coupon rate.
C) maturity date.
D) yield.

Question 54

The annual return to a bond is called the

A) face value.
B) coupon rate.
C) maturity date.
D) yield.

Question 55

All of these are bond rating agencies EXCEPT

A) Fitch.
B) JPMorgan Chase.
C) Moody's.
D) Standard & Poor's.

Question 56

If Moody's changes a bond's rating from Caa to Aaa, we expect to see that bond's

A) yield increase.
B) coupon rate decrease.
C) face value increase.
D) yield decrease.

Question 57

The market value of a firm (the price per share multiplied by the number of shares) is called its

A) coupon rate.
B) market cap.
C) IPO.
D) private equity.

Question 58

Market cap is a firm's price per share _____ the number of shares outstanding.

A) divided by
B) multiplied by
C) minus
D) plus

Question 59

A firm's market cap is

A) what a firm owes to its lenders.
B) what venture capitalists look at when deciding whether to provide a firm with funding.
C) negatively related to its current share price.
D) what a firm is estimated to be worth based on its stock value.

Question 60

If Acme Corporation's current share price is $40 and it has issued 1 million shares of stock, then its market cap is

A) $2,500.
B) $40 million.
C) $40.
D) $400,000.

Question 61

Which of these is a disadvantage of issuing stock relative to bonds?

A) Partial ownership in the business is given up.
B) Stocks are riskier than bonds.
C) Repayments to stockholders are required.
D) Losses are shared by all shareholders, not just the business's founder.

Question 62

The differences between venture capital and private equity primarily involve

A) timing, volume, and market cap.
B) timing, volume, and risk.
C) market cap, timing, and risk.
D) market cap, volume, and risk.

Question 63

Which Internet firm, started by Larry Page and Sergey Brin, earned a large rate of return for the venture capital firms that invested in it?

A) Flickr
B) Google
C) Twitter
D) YouTube

Question 64

Roughly how large were the rates of return earned by Bechtolsheim and Cheriton, the venture capitalists who invested in Google in 2004?

A) less than 200%
B) between 200% and 20,000%
C) between 20,000% and 2,000,000%
D) more than 2,000,000%

Question 65

In its infancy, Google was primarily funded through

A) bond issuance.
B) an initial public offering.
C) stock issuance to hedge funds.
D) venture capitalists.

Question 66

Which statement is TRUE regarding financial capital?

A) It is an important resource used in the production process of goods and services.
B) It is the return to investment in physical capital.
C) It is not an economic resource, but it is used by firms to gain access to resources needed for production.
D) The supply of financial capital increases when risk increases.

Question 67

A bond has a face value of $10,000; a coupon rate of interest of 6%; and an annual interest payment of $600. The bond matures on January 20, 2035. Yesterday the bond sold for $10,700 in the secondary bond market. What is the current yield on the bond?

A) 7%
B) 6.5%
C) 6%
D) 5.6%

Question 68

A bond has a face value of $10,000; a coupon rate of interest of 5%; and an annual interest payment of $500. The bond matures on January 20, 2035. Yesterday the bond sold for $9,300 in the secondary bond market. What is the current yield on the bond?

A) 7.52%
B) 7.00%
C) 5.37%
D) -7.00%

Question 69

A bond has a face value of $1,000. The bond holder receives $50 per year in interest. The bond will mature on March 20, 2035. Yesterday the bond sold for $1,100 in the secondary bond market. Which statement is TRUE based on the given information?

A) The coupon rate of interest is 4.55%.
B) The current yield is 4.55%.
C) The current yield is 10%.
D) The coupon rate of interest is 10%.

Question 70

Andrea started her own company 15 years ago when she launched a line of women's garments. Her firm was successful and grew for a decade. Then sales began to stagnate and subsequently fall. Now her firm is on the verge of bankruptcy. She is willing to give up partial ownership in order to gain funding for the firm to survive its current crisis. Which of these is her MOST likely source of funding?

A) IPO
B) venture capital
C) private equity
D) bonds

Question 71

Gretchen (a scientist) and Gerhard (a designer) are starting a new company to launch an innovative line of high-tech athletic apparel with built-in waterproof sensors. What is the MOST likely source of funding for their new company?

A) an IPO
B) venture capital
C) private equity
D) bonds

Question 72

Who has equity capital in a firm?

A) its bond holders
B) its stockholders
C) the bank that loaned money to the company's owners
D) the customers

Question 73

Which statement is an example of collateral?

A) A firm must pay a higher coupon rate on bonds at their issuance due to risk.
B) Venture capitalists receive partial ownership of a firm.
C) Private equity funders demand partial ownership.
D) A bank has the right to take ownership of a factory building if the borrower defaults on the mortgage loan.

Question 74

Venture capital firms primarily invest in _____, while private equity firms tend to invest in _____.

A) mature firms; mature firms
B) mature firms; start-ups
C) start-ups; mature firms
D) start-ups; start-ups

Question 75

Investment in human capital is investment in _____ that improves the productivity of labor.

A) plant and equipment
B) education and training
C) land and natural resources
D) entrepreneurs

Question 76

The goal of investment in human capital is to increase labor's

A) inputs.
B) opportunity.
C) productivity.
D) quantity.

Question 77

Which of these would NOT be an investment in human capital?

A) college tuition
B) on-the-job training
C) accepting lower wages during an apprenticeship
D) operating a day-care center

Question 78

Employers who wish to boost the productivity of their workers will invest more in

A) land.
B) labor.
C) human capital.
D) bonds.

Question 79

Investment in education and training is called investment in

A) sunk costs.
B) internal rate of return.
C) human capital.
D) fixed costs.

Question 80

Investment in human capital includes all these EXCEPT

A) undertaking an apprenticeship.
B) obtaining on-the-job training.
C) buying stocks and bonds.
D) paying college tuition.