Deck 15: Capital

Question 1

According to the textbook, if a wave of pessimism cause stocks to become generally overvalued, the best investment strategy is to

A)sell as many stocks as possible.
B)hold all available stocks and sell them later.
C)buy only government bonds.
D)continue to diversify your investment portfolio.

Answer 1

D

Question 2

In the loanable funds market

A)demand is downward sloping because lower interest rates make more capital projects profitable.
B)supply is vertical because loanable funds are fixed in any relevant time frame.
C)demand for loanable funds shifts right if the interest rate falls.
D)demand for loanable funds shifts right in the interest rate rises.

Answer 2

A

Question 3

A cash register at a coffee shop should be considered

A)real capital.
B)financial capital.
C)either financial or real capital.
D)none of the choices is correct.

Answer 3

A

Question 4

Say a firm that sells its product at a price of $40 is using 20 units of capital. If the marginal product of the last unit of capital used was 50, and the constant rental rate of capital is $2,000, then this firm should

A)acquire more capital.
B)decrease the amount of capital.
C)continue to use same units of capital.
D)decrease its output.

Question 5

Consider a perpetual bond that pays $200 per year to its owner. By how much would the price of this bond fall if the interest rate rose from 0.04 to 0.05?

A)$4,000
B)$500
C)$2,000
D)$1,000

Question 6

According to the text, a rise in the interest rate

A)will raise consumer savings.
B)will lower consumer savings.
C)may either raise or lower consumer savings.
D)will cause the rental cost of capital to decrease.

Question 7

The efficient market hypothesis would lead to the conclusion that

A)people who win big in the stock market are more lucky than smart.
B)only the highly skilled investors should put their money into the stock market.
C)markets are not good anticipators of events that affect stock value.
D)people who win big in the stock market are usually very good investors.

Question 8

Interest rates are determined by the

A)rental rate of capital.
B)marginal revenue product of physical capital.
C)market supply and demand for loanable funds.
D)physical depreciation of capital.

Question 9

The quantity of loanable funds supplied by firms is

A)independent of the interest rate.
B)positively related to the interest rate.
C)inversely related to the interest rate.
D)negatively related to the rate of return.

Question 10

Suppose the purchase price for a fax machine is $900. If the market rate of interest is 0.04, annual maintenance expenses are 0.03, and physical and technological depreciation is 0.15, how much will the machine's annual rental cost be?

A)$922
B)$702
C)$198
D)$261

Question 11

If the nominal interest rate is 10% and the rate of inflation is 7%, what is the real rate of interest?

A)2.8%
B)7.0%
C)10.3%
D)3.0%

Question 12

Which of the following three statements is true: I) The amount of capital equipment a firm wishes to buy depends on the rate of interest; II) The amount of capital equipment a firm wishes to buy depends on the purchase price of capital; III) The amount of capital equipment a firm wishes to buy depends on the rates of technological and physical depreciation.

A)I
B)II
C)I and II
D)All three statements are true.

Question 13

In the diagram below, the economic rent is represented by

A) area A.
B) area B.
C) areas B and C.
D) areas A and B.

Question 14

Economists are strongly united in their belief that the stock market is

A)efficient.
B)inefficient.
C)an unfair gamble.
D)risk neutral.

Question 15

Economic rent is

A)the sum of the payment actually received by an owner of a factor of production and her reservation price.
B)the difference between the payment actually received by the owner of a factor of production and her reservation price.
C)the payment actually received by an owner of a factor of production.
D)the reservation price of an owner of a factor of production.

Question 16

Suppose a machine generates $500 worth of revenue at the end of each of the next three years, at which time it can be sold to a salvage company for $350. If the annual rate of interest is 0.08, what is the maximum amount a business would pay for this machine if maintenance costs are $100 per year?

A)$1506
B)$1309
C)$9567
D)$1096

Question 17

According to the text discussion of efficient capital markets, which of the following would a well-trained economist recognize as logical and expected?

A)Monkeys throwing darts at a financial page can hit stocks that perform as well as stocks picked by financial experts
B)The best managed companies usually earn higher returns than companies rated lower on the list of well managed companies
C)Experienced investors pay handsome sums to get investment advice from expert advisors
D)Only expert investors should invest in the stock market

Question 18

In the market for loanable funds an increase in the government budget deficit will

A)increase the market rate of interest.
B)decrease the market rate of interest.
C)have no effect over the market rate of interest.
D)increase the supply of loanable funds.

Question 19

A machine produces no benefits now, but $200 in benefits at the end of a year. At the end of the year it falls apart into a heap of dust never to be used again. The present value of its income stream is approximately

A)$220 if the interest rate is 10%.
B)$182 if the interest rate is 10%.
C)$200 no matter what the interest rate is.
D)$200 if the interest rate is 20%.

Question 20

If a perfectly competitive firm can acquire the services of as much capital as it wishes at a constant rental rate of r per year, it should employ capital up to the point at which the

A)rental rate is equal to variable cost.
B)rental rate is equal to marginal cost.
C)marginal product of capital is equal to r.
D)value of the marginal product of capital is equal to r.

Question 21

Since the last recession interest rates have been very low. Also it is generally known that we are close to major breakthroughs in solar energy and battery storage technology. How would these two factors impact the price of oil today?

A)Both factors will work to increase the current price of oil.
B)Both factors will work to decrease the price of oil today.
C)The first factor will increase the current price of oil and the second factor would tend to decrease oil prices today.
D)The first factor will decrease the price of oil today and the second factor will tend to increase the present price.

Question 22

Explain in a paragraph why the quantity demanded for nonrenewable resources will be zero when the supply runs out.

Question 23

Suppose Chase Bank owns a truck that it leases to Ryder Inc. The truck's value is $100,000 and it is expected to deteriorate at a rate of 5 percent per year. If the real interest rate is 2 percent, then Chase's total costs of owning the truck are

A)$7,000
B)$100
C)$5,000
D)$1,000

Question 24

Consider a perpetual bond that pays $150/yr to its owner. What would be the price of the consol if the interest rate is 2 percent?

A)$7,500
B)$75
C)$3
D)$30

Question 25

You are operating a heavy equipment leasing and rental company. Your consultant tells you to focus you marketing strategy on new startup companies rather than thriving companies that are remodeling and seeking new equipment. Why might this suggestion be a good one given our tax code?

Question 26

Suppose you are deciding how much oil to pump from your oil well in the next ten years. If you know oil would sell for $5 per gallon in ten years and the real interest rate is about 4%, the present value of the opportunity cost of selling the oil today would be about

A)$3.38.
B)$4.00.
C)$2.50.
D)$0.

Question 27

What is the actual value of an alleged million-dollar lottery jackpot, paid at the rate of $100,000 at the end of each year for 10 years, assuming that the interest rate remains are 5% over that period?
Check your calculations against these values for the 10 payments

Question 28

When a CEO gets 20 million dollars a year in salary is any of that considered rent?

A)Any part of the salary that exceeds the average CEO salary in the industry is rent.
B)The part of the salary that exceeds the next highest paid CEO in the industry is rent.
C)Because he would leave the company if he got less, none of the money is considered rent.
D)All of the money is economic rent because rent refers to all money that moves resources to where they are used.

Question 29

Peak load pricing helps firms gain profit because

A)people are willing to pay more for the first units they consume of a good.
B)demand shifts left during peak load hours.
C)low prices when demand is strong means high volume sales.
D)they can serve their customers with a smaller capital base.

Question 30

Peak load pricing

A)is designed to shift the demand curve of consumers to the left.
B)is designed to move consumers up along their demand curve.
C)is usually used when supply is very elastic.
D)is designed to encourage more supply rather than to allocate a fixed supply.

Question 31

You have a mortgage that has a nominal interest rate of 7%. The inflation rate is 3.5%. Your real interest rate is _________.

Question 32

Which of the following is considered financial capital?

A)Funds a firm has in a savings account to be used to buy equipment that wears out.
B)Stock and bonds sold to finance operations.
C)Money that accumulates as profit in a firm's checking account.
D)All of these are financial capital.

Question 33

A computer you are considering for your business would add $4,000 per year to your profit. It would cost $400 a year to buy a complete maintenance contract so that you would never have repair and upkeep expense. The obsolescence depreciation is 25% a year. The going market interest rate is 5%. Assume all costs and revenue occur at the end of the year. If the machine cost $12,000 to purchase, should you buy it?

Question 34

A for-profit company that buys real capital and leases it to a non-profit company can

A)offer the capital at a lease rate higher than it would cost the non-profit to buy the capital itself.
B)depreciate the leased capital to lower the firm's tax liability.
C)add a net gain to the economy because one or both companies gain and no one loses.
D)charge a higher than market price to the non-profit company.

Question 35

Risk premium is

A)a payment differential necessary to compensate the investor for having to bear a risk.
B)the additional payment paid by bonds issued by the federal government.
C)the tendency of some investors to incur in high risk.
D)the benefits of buying from a trustworthy institution.

Question 36

A computer you are considering for your business would add $4,000 per year to your profit. It would cost $400 a year to buy a complete maintenance contract so that you would never have repair and upkeep expense. The obsolescence depreciation is 25% a year. The going market interest rate is 5%. Assume all costs and revenue occur at the end of the year. If the going interest rate went up to 10%, how much would you be willing to pay for the machine?

Question 37

A computer you are considering for your business would add $4,000 per year to your profit. It would cost $400 a year to buy a complete maintenance contract so that you would never have repair and upkeep expense. The obsolescence depreciation is 25% a year. The going market interest rate is 5%. Assume all costs and revenue occur at the end of the year. What is the present value of the income stream from the machine?

Question 38

Many minor league ballplayers get called up to play in the majors and then get sent back down again to the minors. Jim makes $26,000 in the minors and then when he gets called up he makes $125,000, though he never plays and is an unknown name to the fans. It is most likely true that

A)Jim's productivity suddenly increases by $99,000 when he is called up to the majors.
B)A portion of Jim's major league salary is economic rent.
C)Jim was playing for way below the value of his marginal product in the minor leagues.
D)Jim is irrational to accept only $26,000 in the minor leagues.

Question 39

A computer you are considering for your business would add $4,000 per year to your profit. It would cost $400 a year to buy a complete maintenance contract so that you would never have repair and upkeep expense. The obsolescence depreciation is 25% a year. The going market interest rate is 5%. Assume all costs and revenue occur at the end of the year. What is the maximum you should be willing to pay for the machine?

Question 40

Suppose you are deciding how much oil to pump from your oil well in the next two years. Other things equal, you will be more likely to pump more oil this year than next year if you expect

A)a higher price for oil this year than next year.
B)a lower price for oil this year than next year.
C)less demand for oil next year than this year.
D)the same price of oil this year than next year.

Question 41

I recently had the electric company install a device to turn off my air conditioner for brief periods during time of excessive heat. They pay me $8 a month for permission to do that. Why would a firm pay me to demand less of their product?

Question 42

Suppose the fracking technology allows oil producers to extract oil reserves previously unavailable. Use a diagram to show the effect this discovery would have over the long run price path of oil. What would be the effect this would have over the price of alternative sources of energy such as solar energy?

Question 43

In the late 1990's, the Wall Street Journal suggested that the stock market is grossly undervalued even while it is breaking all time records monthly. Its argument was that the risk factor of stock was being reduced dramatically due to increased stability in the economy and the prospects for continued long-term growth. Illustrate how this assumption about the economy leads to a rational bidding up of stock prices.