Deck 11: Input Demand: the Capital Market and the Investment Decision

Question 1

You take a class that improves your critical thinking skills. This represents an investment in your

A) human capital.
B) social capital.
C) tangible capital.
D) financial capital.

Answer 1

A

Question 2

Depreciation is

A) the sum of gross and net investment.
B) new additions to a firm's stock of intangible capital.
C) the decline in the economic value of an asset over time.
D) the decrease in the general price level.

Answer 2

C

Question 3

Related to the Economics in Practice on page 235: India's plan to spend more than 8 billion dollars U.S. to improve its road network is best described as an example of investment in

A) intangible capital.
B) human capital.
C) social capital.
D) physical capital.

Answer 3

C

Question 4

Capital goods yield benefits

A) as soon as the investment decision is made.
B) before they are put to use.
C) over their life span.
D) in the present only.

Question 5

"Goodwill" is an example of

A) physical capital.
B) intangible capital.
C) financial capital.
D) a public service industry.

Question 6

Which of the following would constitute an act of investment by a household, as economists use the term?

A) building a new construction vacation home
B) purchasing 100 shares of Microsoft stock
C) buying a corporate bond
D) borrowing money from the bank to pay for a vacation cruise

Question 7

Which of the following would constitute depreciation, as economists use the term?

A) using some of your savings to buy a car
B) a GM shareholder selling some of her stock
C) inventories of firms decreasing due to an increase in sales
D) All new software requires Windows 8, and not Windows 7, as an operating system.

Question 8

As the inventory of a firm falls,

A) there is no change in its capital.
B) its intangible capital decreases.
C) its tangible capital decreases.
D) its social capital increases.

Question 9

A firm's capital is measured as a ________ while investment in new capital is measured as a ________.

A) flow; stock
B) stock; flow
C) stock; change
D) physical amount; dollar value

Question 10

The term investment as it is used by an economist refers to

A) the creation of new capital.
B) the act of buying a share of stock or a bond.
C) a household's savings.
D) the net worth of a company's financial assets.

Question 11

Goods produced by the economic system that are used as inputs in the production of future goods and services are

A) consumable goods.
B) capital goods.
C) tangible goods.
D) depreciation goods.

Question 12

The measure of a firm's ________ is the current market value of its plant, equipment, inventories, and intangible assets.

A) investment
B) depreciation
C) capital stock
D) capital flow

Question 13

An example of tangible capital is

A) a restaurant's unsold, unopened cans of soda.
B) an idea for a new business.
C) the goodwill a firm has established through advertising.
D) knowledge of how to program a computer.

Question 14

A university requires that all entering first-year students learn how to use word processing and spreadsheet software. This is an investment in what type of capital?

A) tangible
B) financial
C) human
D) productive

Question 15

A clothing manufacturer produced 5,000 sweaters, but sold only 4,000 of them. The remaining 1,000 sweaters would be classified as

A) a loss to the firm.
B) part of the firm's tangible capital.
C) part of the firm's intangible capital.
D) a factor of production.

Question 16

A capital asset will depreciate because

A) it wears out physically.
B) a similar product becomes available.
C) of an increase in the tax on profits.
D) All of the above are correct.

Question 17

Firms that offer to pay for college tuition for their employees are investing in ________ capital.

A) tangible
B) productive
C) social
D) human

Question 18

Which of the following would NOT be considered an act of investing in capital?

A) a father paying for his daughter's college education
B) a firm buying a new energy-saving machine
C) the state government building a new road
D) the Postal Service delivering the mail

Question 19

An example of intangible capital is

A) a vacation house.
B) a flower garden.
C) a book.
D) a trained apprenticeship program.

Question 20

In the capital market, households ________ supply the financial resources to firms that allow them to purchase ________.

A) indirectly; capital
B) directly; capital
C) indirectly; land
D) indirectly; labor

Question 21

The stock market, banks, and savings and loans are three examples of institutions that economists would classify as belonging to the financial

A) savings markets.
B) investment market.
C) capital market.
D) labor market.

Question 22

The two most important forms of capital income are

A) rents and profits.
B) investments and rents.
C) dividends and depreciation.
D) interest and profits.

Question 23

Capital stock increases with investment and decreases with depreciation.

Question 24

You are asked to lend a friend $20,000 for a year. At the end of the year your friend agrees to pay you $21,000. The interest rate on this loan is

A) 4.50%
B) 5.00%.
C) 5.50%.
D) indeterminate from this information.

Question 25

Those goods produced by the economic system that are used as inputs in the production of future goods and services are known as capital.

Question 26

You agree to lend ________ to a friend for a year at an annual interest rate of 10%. At the end of the year your friend pays you $500 in interest.

A) $50
B) $550
C) $5,000
D) $5,500

Question 27

Capital income includes all of the following EXCEPT

A) rents.
B) interest.
C) profit.
D) salary.

Question 28

Capital stock is the current market value of all of the shares of stock a company has.

Question 29

Capital is defined as the current market value of a firm's productive assets.

Question 30

Residential structures and inventories are examples of tangible capital.

Question 31

Related to the Economics in Practice on page 236: In 2010, Tesla Motors decided to become a public company by offering shares of stock to the public on a stock exchange. Like most other firms, Tesla relied on ________ to manage the sales of stock from its Initial public offering.

A) inside management
B) investment banks
C) its board of directors
D) the Federal Reserve

Question 32

The market in which households supply their savings to firms that demand funds in order to buy capital goods is the ________ market.

A) money
B) savings
C) investment
D) capital

Question 33

You agree to lend a friend $15,000 for a year at an annual interest rate of 20%. At the end of the year your friend must pay you ________ in interest.

A) $133
B) $750
C) $1,500
D) $3,000

Question 34

The value of capital is as great as the services it produces over time.

Question 35

The funds that firms use to buy capital come directly or indirectly from households.

Question 36

You will agree to lend your sister's grandma's daughter $2,000 for a year, if at the end of the year she pays you $2,200. The interest rate you are charging her is

A) 1.1%.
B) 9.09%.
C) 10%.
D) 20%.

Question 37

You agree to lend a friend $20,000 for a year at an annual interest rate of 45%. At the end of the year your friend must pay you ________ in interest.

A) $133
B) $750
C) $1,900
D) $9,000

Question 38

When a household lends money directly to a firm, the firm gives the household a

A) share of stock.
B) certificate of investment.
C) bond.
D) dividend.

Question 39

Human capital is a type of social capital.

Question 40

You are asked to lend a friend $10,000 for a year. At the end of the year your friend agrees to pay you $10,500. The interest rate on this loan is

A) 0.05%.
B) 5.0%
C) 105%.
D) indeterminate from this information.

Question 41

You borrow $10,000 at an interest rate of 5% to open Movies Galore, a DVD rental store. You will earn an economic profit if

A) the return on your investment is between 0 and 5%.
B) the return on your investment is 5%.
C) the return on your investment is greater than 5%.
D) the return on your investment is 10% or greater.

Question 42

A software company writes a better operating system for personal computers and earns very large profits on this operating system. Which of the following is true?

A) The profits this firm earns are a return for an innovation.
B) The profits this firm earns aren't deserved, as the firm did not take any risks.
C) This firm must not be in a competitive market if it was able to earn a profit.
D) The firm must be a monopoly.

Question 43

Most mortgage loans in the United States are written by

A) Fannie Mae.
B) banks.
C) savings and loans.
D) mortgage brokers.

Question 44

You use $45,000 of your own money to start an espresso stand. During the first year you earn a 10% return on that investment. If the current interest rate is 8%, you earn an economic profit of

A) -$900.
B) $100.
C) $500.
D) $900.

Question 45

A firm's retaining of earnings is really equivalent to the firm

A) lending money to households.
B) borrowing money from households.
C) decreasing the net worth of households.
D) decreasing its own net worth.

Question 46

You paid $90 for a psychology textbook at the beginning of the semester. At the end of the semester you sell the textbook for $75. The textbook has depreciated

A) $1.00.
B) $15.00.
C) $20.00.
D) an indeterminate amount based on this information.

Question 47

Assume that the current interest rate is 6%. You invest $10,000 of your own money in a restaurant that you own and operate. The normal return on this investment is

A) $0, as you used your own money.
B) $600, as that is the interest forgone by not lending the money to someone else at a 6% interest rate.
C) $10,000, as that is the amount invested in the restaurant.
D) $10,600, the amount invested plus the interest charge on the investment.

Question 48

As a holder of a share of common stock, you are

A) entitled to a portion of the firm's revenues.
B) entitled to a portion of the firm's profits.
C) entitled to a standard percentage return on your investment.
D) responsible for the liabilities of the corporation.

Question 49

GM decides to build a new plant using retained earnings; all of the following are true EXCEPT:

A) GM's tangible capital will increase as a result.
B) GM is engaging in saving on behalf of its shareholders.
C) GM stock appreciates in value.
D) GM is avoiding experiencing opportunity costs.

Question 50

When we speak of capital, we refer primarily to money and financial assets such as bonds and stock.

Question 51

You use $5,000 of your own money to start a dog-walking business. During the first year you earn a 6% return on your investment. If the current interest rate is 8%, you earn an economic profit of

A) -$60.
B) -$100.
C) $200.
D) $300.

Question 52

Households' ________ limit(s) firms' ability to invest in capital.

A) investment in stock
B) savings decisions
C) supply of land
D) tax liability

Question 53

When you use your own savings to start a business, you make a profit

A) after the first dollar you earn, because you borrowed no funds to start the business.
B) after you earn an amount equal to the savings you used to start the business.
C) only after you cover the opportunity cost of using your savings to start your business.
D) only after you earn double the amount of money you invested.

Question 54

A fund that takes household savings and puts them into high-risk ventures in exchange for a share of the profits if the new business succeeds is a

A) business capital fund.
B) innovation capital fund.
C) risk capital fund.
D) venture capital fund.

Question 55

You borrow $10,000 at an interest rate of 5% to open Movies Galore, a DVD rental store. You will earn an economic loss if

A) the return on your investment is less than 5%.
B) the return on your investment is exactly 5%.
C) the return on your investment is greater than 5%.
D) indeterminate from given information.

Question 56

You use $50,000 of your own money to start a catering business. During the first year you earn a 5% return on that investment. If the current interest rate is 8%, you earn an economic profit of

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

Question 57

In economics, "investment" refers only to the creation of new capital.

Question 58

Payments for capital include interest and rent.

Question 59

You use $2,000 of your own money to start a dog-sitting service. During the first year you earn a 10% return on your investment. If the current interest rate is 7%, you earn an economic profit of

A) $60.
B) $140.
C) $200.
D) $340.

Question 60

Related to the Economics in Practice on page 241: In terms of value, a majority of the shares of stock in the United States are held by

A) corporate insiders.
B) foreign governments.
C) households.
D) the U.S. government.

Question 61

When a Democrat is elected as president, business leaders expect that the corporate profits tax will be increased. Most likely, this will cause business firms, ceteris paribus, to

A) plan to increase investment in the future to compensate for the higher tax rate.
B) decrease investment because they would expect lower benefits from investment.
C) not change their investment plans because higher corporate profit taxes will not change the demand for their product.
D) increase investment because the higher corporate profits tax will increase the return on any investment.

Question 62

Savers and investors interact through intermediaries in financial capital markets.

Question 63

Polar Water, a company that delivers bottled water, is considering three investment opportunities. The expected returns for each of the projects are as follows: buying a new delivery van, 20%; computer training for its office staff, 15%; and defensive driving training for its drivers, 8%. If the current interest rate is 10%, the firm should invest in

A) only the purchase of a new delivery van.
B) the purchase of a new delivery van and computer training for its office staff.
C) all of the projects because the average of the returns is greater than 10%.
D) only the office staff training project.

Question 64

Refer to the data provided in Table 11.1 below to answer the following questions.
Table 11.1 $$\begin{array} { l c c } { \text { Project } } & \begin{array} { c } \text { Total Investment } \\\text { (dollars) }\end{array} & \begin{array} { c } \text { Expected Rate of Return } \\\text { (percentage) }\end{array} \\\hline \text { New notebook computer for sales staff } & \$ 500,000 & 22 \\\text { Remodel for distribution center } & \$ 400,000 & 18 \\\text { On-site day care center } & \$ 200,000 & 10 \\\text { Employee fitness center } & \$ 100,000 & 8\end{array}$$

-Refer to Table 11.1. If the interest rate is 9%, Nashbar Bicycle's total investment would be

A) $200,000.
B) $300,000.
C) $900,000.
D) $1,100,000.

Question 65

When making the decision to invest, the evaluation of the expected flow of future productive services that the investment project being considered will yield is an important consideration. This statement is accurate for

A) firms, but not for governments and households considering an investment project.
B) firms and governments, but not for households considering an investment project.
C) firms and households, but not for governments considering an investment project.
D) firms, households, and governments.

Question 66

You work as a forecaster for the major producer of digital cameras. You know that there is a strong positive relationship between the demand for digital cameras and the birth of a first child. A report has just been issued predicting that the birthrate is expected to increase steadily over the next 10 years. You should recommend which of the following courses of action to the firm?

A) Don't change the amount of investment made, but raise the price of digital cameras in response to the expected increase in the demand.
B) Suggest that the investment in new capital to produce digital cameras be made only after it can be verified that the birthrate has increased.
C) Start to increase investment now so that when the birthrate increases and the demand for digital cameras increases, the firm will be able to meet that new demand.
D) Suggest that the firm curtail its advertising to avert a substantial increase in demand for digital cameras.

Question 67

Refer to the data provided in Table 11.1 below to answer the following questions.
Table 11.1 $$\begin{array} { l c c } { \text { Project } } & \begin{array} { c } \text { Total Investment } \\\text { (dollars) }\end{array} & \begin{array} { c } \text { Expected Rate of Return } \\\text { (percentage) }\end{array} \\\hline \text { New notebook computer for sales staff } & \$ 500,000 & 22 \\\text { Remodel for distribution center } & \$ 400,000 & 18 \\\text { On-site day care center } & \$ 200,000 & 10 \\\text { Employee fitness center } & \$ 100,000 & 8\end{array}$$

-Refer to Table 11.1. If the interest rate is 20%, Nashbar Bicycle's total investment would be

A) $0.
B) $100,000.
C) $500,000.
D) $700,000.

Question 68

Venture capital funds involve very low risk.

Question 69

Which of the following statements of the expected flow of future benefits is false?

A) Firms must rely on forecasts of expected future benefits to make sensible investment decisions.
B) Households, business firms, and governments all evaluate the expected flow of benefits when making investment decisions.
C) If future benefits are overestimated by the firm, the firm will under invest in capital.
D) If future benefits are underestimated by the firm, the firm will under invest in capital.

Question 70

You borrow $40,000 at an interest rate of 5% to open Organic Foods, an all-natural food store. You will earn an economic profit if the return on your investment is

A) greater than 5%.
B) 5%.
C) between 0 and 5%.
D) 10% or greater.

Question 71

The level of household savings constrains firm investment.

Question 72

Refer to the data provided in Table 11.1 below to answer the following questions.
Table 11.1 $$\begin{array} { l c c } { \text { Project } } & \begin{array} { c } \text { Total Investment } \\\text { (dollars) }\end{array} & \begin{array} { c } \text { Expected Rate of Return } \\\text { (percentage) }\end{array} \\\hline \text { New notebook computer for sales staff } & \$ 500,000 & 22 \\\text { Remodel for distribution center } & \$ 400,000 & 18 \\\text { On-site day care center } & \$ 200,000 & 10 \\\text { Employee fitness center } & \$ 100,000 & 8\end{array}$$

-Refer to Table 11.1. If the interest rate is 25%, Nashbar Bicycle's total investment would be

A) $0.
B) $100,000.
C) $500,000.
D) $1,100,000.

Question 73

Refer to the data provided in Table 11.1 below to answer the following questions.
Table 11.1 $$\begin{array} { l c c } { \text { Project } } & \begin{array} { c } \text { Total Investment } \\\text { (dollars) }\end{array} & \begin{array} { c } \text { Expected Rate of Return } \\\text { (percentage) }\end{array} \\\hline \text { New notebook computer for sales staff } & \$ 500,000 & 22 \\\text { Remodel for distribution center } & \$ 400,000 & 18 \\\text { On-site day care center } & \$ 200,000 & 10 \\\text { Employee fitness center } & \$ 100,000 & 8\end{array}$$

-Refer to Table 11.1. If the interest rate is 5%, Nashbar Bicycle should

A) fund all of the projects.
B) not fund any of the projects.
C) fund only the employee fitness center.
D) fund all of the projects except for the employee fitness center.

Question 74

Refer to the data provided in Table 11.1 below to answer the following questions.
Table 11.1 $$\begin{array} { l c c } { \text { Project } } & \begin{array} { c } \text { Total Investment } \\\text { (dollars) }\end{array} & \begin{array} { c } \text { Expected Rate of Return } \\\text { (percentage) }\end{array} \\\hline \text { New notebook computer for sales staff } & \$ 500,000 & 22 \\\text { Remodel for distribution center } & \$ 400,000 & 18 \\\text { On-site day care center } & \$ 200,000 & 10 \\\text { Employee fitness center } & \$ 100,000 & 8\end{array}$$

-Refer to Table 11.1. If the interest rate is 28%, Nashbar Bicycle should

A) fund all of the projects.
B) fund the remodeling of the distribution center and the on-site day care center.
C) fund only the purchase of new notebook computers for its sales staff.
D) not fund any of the projects.

Question 75

Refer to the data provided in Table 11.1 below to answer the following questions.
Table 11.1 $$\begin{array} { l c c } { \text { Project } } & \begin{array} { c } \text { Total Investment } \\\text { (dollars) }\end{array} & \begin{array} { c } \text { Expected Rate of Return } \\\text { (percentage) }\end{array} \\\hline \text { New notebook computer for sales staff } & \$ 500,000 & 22 \\\text { Remodel for distribution center } & \$ 400,000 & 18 \\\text { On-site day care center } & \$ 200,000 & 10 \\\text { Employee fitness center } & \$ 100,000 & 8\end{array}$$

-Refer to Table 11.1. If the interest rate is 20%, Nashbar Bicycle should

A) fund only the purchase of new notebook computers for its sales staff.
B) fund all of the projects except for the purchase of new notebook computers for its sales staff.
C) fund all of the projects.
D) not fund any of the projects.

Question 76

A firm can invest in one of two projects-the purchase of new delivery vans or the training of its sales staff in the use of new sales techniques. Both projects cost the same amount of money. The purchase of new delivery vans is expected to reduce costs by $5,000 each year for 10 years. The training of the sales staff in the use of a new sales technique is expected to increase revenues by $5,000 each year for 5 years. Which of the following is true?

A) Each of these projects would have the same expected rate of return, as they both cost the same.
B) The training of the sales staff would have the higher expected rate of return, as it increases revenues whereas the purchase of delivery vans only reduces costs.
C) The purchase of delivery vans would have the higher expected rate of return, as it will reduce costs for a longer time period than the sales staff training will increase revenues.
D) The expected rates of return for these two projects cannot be compared, as one project reduces costs and the other increases revenues.

Question 77

The expected cost of an investment

A) is zero if a firm uses its own funds.
B) equals the market rate of interest plus the normal rate of return on an investment.
C) depends on the market interest rate.
D) equals the market rate of interest plus the inflation rate.

Question 78

Refer to the data provided in Table 11.2 below to answer the following questions.
Table 11.2 $$\begin{array}{l}\begin{array} { l c c } &\text { Total Investment}&\text { Expected Rate of Return }\\{ \text { Project } } & \text { (dollars) } & \text { (percentage) } \\\hline \text { New bookkeeping software } & \$ 150,000 & 5 \\\text { New tractor } & \$ 200,000 & 12 \\\text { New grain storage tanks } & \$ 250,000 & 10 \\\text { Irrigation system } & \$ 500,000 & 15 \\\hline\end{array}\end{array}$$

-Refer to Table 11.2. If the interest rate is 13%, then the farmer will engage in investment of

A) $500,000.
B) $600,000.
C) $700,000.
D) $1,100,000.

Question 79

Owning a share of stock entitles the shareholder to a portion of the firm's profits.

Question 80

Refer to the data provided in Table 11.2 below to answer the following questions.
Table 11.2 $$\begin{array}{l}\begin{array} { l c c } &\text { Total Investment}&\text { Expected Rate of Return }\\{ \text { Project } } & \text { (dollars) } & \text { (percentage) } \\\hline \text { New bookkeeping software } & \$ 150,000 & 5 \\\text { New tractor } & \$ 200,000 & 12 \\\text { New grain storage tanks } & \$ 250,000 & 10 \\\text { Irrigation system } & \$ 500,000 & 15 \\\hline\end{array}\end{array}$$

-Refer to Table 11.2. If the interest rate is 11%, then the farmer will only

A) buy the bookkeeping software.
B) buy the bookkeeping software and the grain storage tanks.
C) buy the tractor and the irrigation system.
D) buy the tractor.