Deck 13: Capital, Interest, and Corporate Finance

Question 1

Increased saving today means

A)more consumption today and in the future
B)less consumption today and in the future
C)more consumption today and less in the future
D)less consumption today and more in the future
E)more income today, but the net effect of increased income on the balance between consumption and saving cannot be determined in advance

Answer 1

less consumption today and more in the future

Question 2

The benefit of the production of capital is

A)decreased current production of consumption goods
B)increased future production of consumption goods
C)the amount of roundabout production
D)abundant capital accumulation
E)the decreased amount of future capital available

Answer 2

increased future production of consumption goods

Question 3

Because present consumption is more highly valued higher than future consumption, interest is paid.

Answer 3

True

Question 4

Saving is necessary for production because

A)more roundabout production is better
B)less roundabout production is better
C)production takes time
D)production is expensive
E)production requires labor

Question 5

The production of capital goods, which are then used to produce consumer goods, is called

A)efficient production
B)intermediation
C)time preferences
D)roundabout production
E)derived production

Question 6

Most companies that sell CDs by mail deliver in 1 to 2 weeks.Mosey Music, Inc., takes 4 weeks to deliver CDs.We should expect that Mosey Music

A)will lose all its customers
B)will not lose customers because the good in question is CDs, not the delivery date
C)will have to charge more for its CDs to make up for the business it loses through slow delivery
D)will have to charge less for its CDs to compete with firms that deliver CDs faster
E)will be able to charge the same amount for its CDs as other firms do, as long as the CD quality is the same

Question 7

Saving is

A)helpful for production but not necessary
B)not useful for production because they imply a decrease in consumption
C)required for production
D)not useful for production because it is not a resource
E)not useful for production because savers must be paid interest

Question 8

Which of the following is an example of roundabout production?

A)A farmer switches from growing soybeans to growing wheat, getting fewer crops per year as a result.
B)A farmer switches from growing soybeans to growing wheat, getting more crops per year as a result.
C)A self-employed dressmaker becomes a wage worker at a factory that makes dresses.
D)A coal mine is sold by its owners to its workers and run as a cooperative.
E)A telemarketing firm declares a holiday for two days while a new phone system is installed.

Question 9

Which of the following is an example of roundabout production?

A)Paul pays Ringo to wash his car.
B)A church has a bake sale to raise money for a new narthex.
C)Jane saves her money to buy a stereo.
D)Robinson Crusoe makes a fish net to help him catch more fish per day.
E)Business owners in Minneapolis buy blocks of Minnesota Twins baseball tickets to help guarantee that the team will stay in town.

Question 10

For the typical consumer, present consumption is

A)preferred to future consumption
B)not preferred to future consumption
C)preferred to future saving
D)not preferred to future saving
E)financed out of present saving

Question 11

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.

Question 12

The production of capital is a form of roundabout production.

Question 13

The opportunity cost of producing capital is

A)decreased current production of consumption goods
B)increased future production of consumption goods
C)the amount of roundabout production
D)abundant capital accumulation
E)the decreased amount of future capital available

Question 14

Goods and activities typically are more highly valued the sooner they can be enjoyed, other things constant,

A)only when interest rates are positive
B)because interest rates are positive
C)only when people save
D)because people save
E)because people have positive rates of time preference

Question 15

Production cannot occur without

A)saving
B)government
C)a market system
D)low interest rates
E)high interest rates

Question 16

Exhibit 13-1 The movement from x to x' in Exhibit 13-1 represents a(n)

A)increase in roundabout production; future ability to produce consumer goods will be higher as a result
B)increase in roundabout production; future ability to produce consumer goods will be lower as a result
C)decrease in roundabout production; future ability to produce consumer goods will be higher as a result
D)decrease in roundabout production; future ability to produce consumer goods will be lower as a result
E)decrease in roundabout production but one that does not have an effect on future ability to produce consumer goods

Question 17

Roundabout production occurs when

A)entrepreneurs hire others to work for them, rather than taking the time to produce things themselves
B)workers avoid intermediary entrepreneurs and cooperate to produce output themselves
C)inefficient technology is used
D)producers make capital goods instead of consumption goods
E)a company takes time to market shares in the company

Question 18

Another term for an investment good is

A)interest
B)savings
C)capital
D)rent
E)production

Question 19

If an economy increases the amount of roundabout production today,

A)more consumer goods can be produced in the present
B)fewer consumer goods can be produced in the future
C)more capital accumulates
D)less capital accumulates
E)fewer capital goods can be produced in the future

Question 20

The rate of time preference is positive

A)only when interest rates are positive
B)because interest rates are positive
C)only when people save
D)because people save
E)because people prefer goods now to the same goods later

Question 21

A profit-maximizing firm invests up to the point at which the marginal rate of return on capital is greatest.

Question 22

In order to predict the marginal rate of return on investment, producers must forecast the interest rate.

Question 23

If the market interest rate increases, then

A)the cost of borrowing increases and so saving falls
B)the opportunity cost of consuming a good in the future increases and saving, therefore, increases
C)the opportunity cost of consuming a good in the future increases and saving, therefore, falls
D)the reward for saving diminishes and so present consumption increases
E)the reward for saving increases and so saving increases

Question 24

If the interest rate increases from 6 percent to 10 percent per year, each $100 saved will earn

A)$4 per year more than before
B)$6 per year more than before
C)$10 per year more than before
D)$16 per year more than before
E)$60 per year more than before

Question 25

The old adage that "a bird in the hand is worth two in the bush" refers to

A)a normal good
B)opportunity cost
C)scarcity
D)a positive rate of time preference
E)a willingness to forgo current consumption in order to achieve increased future consumption

Question 26

If people have a positive rate of time preference, they

A)must be rewarded for saving
B)are willing to pay more for a good that saves them money if they hold on to it a long time
C)prefer to consume in the future when things are cheaper
D)prefer time deposits to savings accounts
E)prefer leisure over labor

Question 27

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

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

Question 28

The marginal rate of return on investment is found by dividing the marginal resource cost per year by the marginal revenue product.

Question 29

The difference between income and consumption is

A)rent
B)profit
C)saving
D)opportunity cost
E)roundabout consumption

Question 30

If we assume that a unit of capital will last indefinitely, the marginal rate of return on investment equals the marginal revenue product of capital divided by its marginal resource cost.

Question 31

Which of the following does not reflect a positive rate of time preference?

A)People are willing to pay high prices to see new movies at first-run theaters.
B)A bank pays interest on savings accounts.
C)Ed puts money in his mattress for a rainy day.
D)Dry cleaners that provide faster service can charge more.
E)A college freshman parties all semester, then stays awake studying for 50 straight hours during final exam week.

Question 32

The reward for forgoing present consumption is

A)rent
B)profit
C)roundabout production
D)transfer payment
E)interest

Question 33

If Arnold has a positive rate of time preference, he desires to

A)save in case of inflation
B)consume now rather than later
C)invest in stocks and bonds
D)invest in education
E)plan for retirement

Question 34

Which of the following does not reflect a positive rate of time preference?

A)Concert-goers yell and scream when the stage is still dark an hour after the concert was scheduled to start.
B)Borrowers have to pay interest on loans.
C)A dieter, allowed three ounces of butter per day, spends the whole allotment on her toast at breakfast.
D)A dieter, allowed three ounces of butter per day, promises himself some new clothes if he can break the habit of spending the whole allotment on his toast at breakfast.
E)A student stays up late every night for a week to finish her term paper two months before it is due.

Question 35

The interest rate compensates

A)bankers for their time spent on paperwork
B)borrowers for their increased consumption today
C)savers for consumption forgone today
D)consumers for more consumption today
E)the Fed for its efforts to control the money supply

Question 36

Interest is a payment for deferred

A)taxation
B)saving
C)consumption
D)investment
E)none of the above

Question 37

If the annual interest rate is 5 percent,

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 38

A positive rate of time preference means that

A)time is relative to consumption
B)consumption in the future is more important than consumption today
C)consumption today is valued less than consumption in the future
D)consumption in the future is valued less than consumption today
E)consumption in the future and consumption today are positively related

Question 39

If the annual interest rate is 4 percent, a consumer who spends $100 today

A)will have to pay back $104 to the bank
B)would have to pay $104 next year to get the same goods
C)will receive $96 from the bank next year
D)would have to pay $96 next year to get the same goods
E)is giving up the ability to spend $104 on goods next year

Question 40

By saving, households

A)are supplying loanable funds
B)are demanding loanable funds
C)are investing
D)are acting as a financial intermediary
E)must find a borrower

Question 41

Exhibit 13-2 The marginal product of the seventh copy machine listed in Exhibit 13-2 is

A)-5 copies
B)5 copies
C)25 copies
D)135 copies
E)165 copies

Question 42

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

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 43

Exhibit 13-3 Exhibit 13-3 gives data on the number of tools a certain firm buys to use in its production process.Assume that the tools are expected to last indefinitely, that operating expenses are negligible, and that the price of the firm's output is expected to remain constant in the future.At what interest rate would the firm in Exhibit 13-3 choose to buy 3 machines?

A)5%
B)8%
C)12%
D)20%
E)24%

Question 44

Exhibit 13-2 One reason for the decline in output with the seventh machine in Exhibit 13-2 could be that

A)the increase in the company's power consumption when seven machines are being used causes its electricity bills to be much higher
B)the increase in the company's power consumption when seven machines are being used causes fuses to blow more often
C)no one uses the seventh machine; only six are necessary
D)no one uses the seventh machine; only five are necessary
E)workers no longer have to wait in line to make copies because more machines are available

Question 45

Exhibit 13-3 Exhibit 13-3 gives data on the number of tools a certain firm buys to use in its production process.Assume that the tools are expected to last indefinitely, that operating expenses are negligible, and that the price of the firm's output is expected to remain constant in the future.At what interest rate would the firm in Exhibit 13-3 choose not to buy any machines?

A)10%
B)20%
C)30%
D)35%
E)40%

Question 46

Exhibit 13-4 Exhibit 13-4 shows data gathered by Memo Co.as it prepares to purchase personal computers for its sales offices.Assume that the personal computers are expected to last indefinitely, that operating expenses are negligible, and that the price of Memo's product is expected to remain constant in the future.The marginal rate of return on 60 personal computers is closest to

A)19 percent
B)24 percent
C)30 percent
D)52 percent
E)520 percent

Question 47

Exhibit 13-4 Exhibit 13-4 shows data gathered by Memo Co.as it prepares to purchase personal computers for its sales offices.Assume that the personal computers are expected to last indefinitely, that operating expenses are negligible, and that the price of Memo's product is expected to remain constant in the future.Given the rate of interest, how many personal computers will Memo Co.select?

A)40
B)60
C)80
D)100
E)120

Question 48

Marginal revenue product for a price taker equals

A)MP ´ P
B)MP/MRC
C)MP ´ MRC
D)MRC/MP
E)MP/P

Question 49

Exhibit 13-2 Given the data in Exhibit 13-2, the marginal product is

A)positive for all copy machines
B)positive for the first copy machine only
C)positive for the first four copy machines only
D)positive for the first five copy machines only
E)never positive

Question 50

Exhibit 13-4 Exhibit 13-4 shows data gathered by Memo Co.as it prepares to purchase personal computers for its sales offices.Assume that the personal computers are expected to last indefinitely, that operating expenses are negligible, and that the price of Memo's output is expected to remain constant in the future.As the number of personal computers Memo Co.might purchase increases to 120, the marginal rate of return on that kind of capital will

A)decrease from 24 percent and eventually become negative
B)rise from 24 percent
C)decrease from 24 percent but never become negative
D)remain constant because the price of personal computers is constant
E)remain constant because the increments being considered are constant

Question 51

Exhibit 13-2 Suppose that the data in Exhibit 13-2 describes a shop that sells photocopies at $0.10 each.At this price, the marginal revenue product of the fourth machine is

A)$0.10
B)$0.40
C)$4
D)$40
E)$400

Question 52

Exhibit 13-2 The marginal product of the third copy machine listed in Exhibit 13-2 is

A)4 copies
B)6 copies
C)24 copies
D)28 copies
E)52 copies

Question 53

A marginal revenue product curve shows the change in

A)total revenue caused by a one-unit change in output, other things constant
B)total revenue caused by a one-unit change in an input, other things constant
C)total product caused by a one-unit change in output, other things constant
D)total product caused by a one-unit change in an input, other things constant
E)total revenue product caused by a one-unit change in the price of the output, other things constant

Question 54

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?

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.

Question 55

All types of capital

A)are forms of resources that can be used in future production
B)require a physical existence
C)earn an economic rent
D)yield profits for their owners
E)require obtaining more education and job skills

Question 56

Exhibit 13-4 Exhibit 13-4 shows data gathered by Memo Co.as it prepares to purchase personal computers for its sales offices.Given the data in Exhibit 13-4, the price of personal computers must be

A)$5, 000 each
B)$500 each
C)$250 each
D)$200 each
E)increasing as Memo Co.purchases more personal computers

Question 57

Exhibit 13-4 Exhibit 13-4 shows data gathered by Memo Co.as it prepares to purchase personal computers for its sales offices.Given the data in Exhibit 13-4, Memo Co.

A)must be a perfectly competitive seller of output
B)must be a monopoly seller of output
C)must be a perfectly competitive buyer of personal computers
D)cannot be a perfectly competitive buyer of personal computers
E)may or may not be a perfectly competitive buyer of personal computers

Question 58

Exhibit 13-3 Exhibit 13-3 gives data on the number of tools a certain firm buys to use in its production process.Assume that the tools are expected to last indefinitely, that operating expenses are negligible, and that the price of the firm's output is expected to remain constant in the future.At an interest rate of 7 percent, the firm in Exhibit 13-3 should select

A)the maximum number of tools available because price does not decrease as output increases
B)the minimum number of tools available because price does not increase as output increases
C)three tools
D)four tools
E)five tools

Question 59

Exhibit 13-3 Exhibit 13-3 gives data on the number of tools a certain firm buys to use in its production process.Assume that the tools are expected to last indefinitely, that operating expenses are negligible, and that the price of the firm's output is expected to remain constant in the future.At an interest rate of 10 percent, the firm in Exhibit 13-3 should select

A)the maximum number of tools available because price does not decrease as output increases
B)the minimum number of tools available because price does not increase as output increases
C)three tools
D)four tools
E)five tools

Question 60

The concept of marginal productivity is applicable to

A)all of the following
B)capital
C)entrepreneurial talent
D)land
E)labor

Question 61

If the marginal rate of return expected from a purchase of equipment is greater than the market interest rate, the firm should

A)not purchase the equipment
B)purchase the equipment
C)either purchase or not purchase the equipment, depending on the marginal resource cost
D)inform stockholders that the company expects a decrease in earnings from the purchase
E)seek government assistance in raising market interest rates

Question 62

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

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

Question 63

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?

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 64

Exhibit 13-7 In Exhibit 13-7, if the interest rate is 8 percent, investment will equal approximately

A)$1, 500, 000
B)$500, 000
C)$1, 000, 000
D)$950, 000
E)$1, 250, 000

Question 65

If a firm can borrow or lend at a 6 percent annual interest rate, it will

A)buy more capital if it has the funds on hand than if it has to borrow them
B)ignore the market rate of interest when making capital investment decisions
C)buy less capital if it has the funds on hand than if it has to borrow them
D)ignore the market rate of interest when making saving decisions
E)buy the same amount of capital whether it has the funds on hand or has to borrow them

Question 66

A firm's demand curve for investment is its

A)marginal resource cost curve
B)marginal product curve
C)marginal revenue curve
D)marginal rate of return on investment curve
E)supply of loanable funds curve

Question 67

A firm's marginal rate of return on investment curve shows the amount

A)saved by the firm at each alternative interest rate
B)invested by the firm at each alternative interest rate
C)saved by the firm at each alternative rate of time preference
D)invested by the firm at each alternative marginal resource cost
E)saved by the firm at each alternative marginal revenue product of investment

Question 68

Exhibit 13-5 Exhibit 13-5 shows data on the various dough-mixing machines that a donut shop is considering buying.The marginal resource cost of the machine with the three-quart mixing bowl is

A)$50
B)$100
C)$1, 000
D)$3, 000
E)$550

Question 69

Exhibit 13-6 In Exhibit 13-6, the marginal revenue product of the

A)second sewing machine is $20
B)fourth sewing machine is $80
C)first sewing machine is $30
D)third sewing machine is $72
E)fifth sewing machine is $40

Question 70

Each firm has a downward-sloping demand curve for loanable funds because its

A)marginal resource cost curve slopes downward
B)marginal revenue product curve slopes upward
C)marginal rate of return on investment curve slopes downward
D)marginal resource cost slopes upward
E)marginal rate of return on investment curve slopes upward

Question 71

Exhibit 13-6 In Exhibit 13-6, if the rental price of each sewing machine is $70, how many machines should be used?

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

Question 72

When the marginal rate of return expected from a purchase of equipment is less than the market interest rate, then the firm should

A)seek government assistance in decreasing the market interest rate
B)inform stockholders that the company can expect increased earnings from the purchase
C)either purchase or not purchase the equipment depending on the marginal resource cost of the equipment
D)purchase the equipment
E)not purchase the equipment

Question 73

Exhibit 13-7 In Exhibit 13-7, if the interest rate is 5 percent, investment will equal approximately

A)$1, 500, 000
B)$700, 000
C)$1, 000, 000
D)$950, 000
E)$1, 250, 000

Question 74

Suppose that a firm's capital equipment is expected to last indefinitely, that operating expenses on the equipment are negligible, and that the price of the firm's product is expected to remain constant in the future.Under these circumstances, the firm's marginal rate of return on investment is equal to capital's

A)marginal resource cost as a percentage of its marginal revenue product
B)marginal product as a percentage of its marginal revenue product
C)marginal revenue product as a percentage of its marginal product
D)marginal resource cost as a percentage of the price of capital
E)marginal revenue product as a percentage of its marginal resource cost

Question 75

IBM's marginal rate of return on investment curve equals its

A)supply of loanable funds curve
B)supply of investment curve
C)marginal revenue product curve
D)marginal revenue cost curve
E)investment demand curve

Question 76

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.The marginal rate of return on the machine with the three-quart bowl is

A)1 percent
B)5 percent
C)10 percent
D)20 percent
E)55 percent

Question 77

The marginal rate of return on investment is equal to capital's

A)MRC ´ MRP/2
B)MRC/MRP
C)MRP/MRC
D)MRC ´ MRP ´ the interest rate

Question 78

Exhibit 13-5 Exhibit 13-5 shows data on the various dough-mixing machines that a donut shop is considering buying.The marginal product of the machine with the three-quart mixing bowl is

A)50 donuts per day
B)100 donuts per day
C)1, 000 donuts per day
D)550 donuts per day
E)5 percent

Question 79

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 market rate of interest is 8 percent, what size machine should the donut shop buy?

A)none
B)the machine with the one-quart bowl
C)the machine with the two-quart bowl
D)the machine with the three-quart bowl
E)the answer can't be determined from the given data

Question 80

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?

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