Question 1

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(n)

Accepted Answer

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

Question 2

Existing firms will want to leave the rental car industry if the normal rate of return in the industry is ________ and the return that firms earn in this industry equals exactly ________.

Accepted Answer

A)  6%; 6% 
B)  4%; 7% 
C)  12%; 9% 
D)  1%; 2%

Question 3

Related to the Economics in Practice on page 238: Returns in the stock market are ________ than the returns on government bonds.

Accepted Answer

A)  much more volatile 
B)  always worth more 
C)  much more stable 
D)  always worth less

Question 4

You work as a forecaster for a luxury automobile manufacturer. You know that there is a strong positive relationship between the demand for luxury automobiles and income levels. The government issues a report predicting that it expects income levels to increase steadily over the next 5 years. All else equal, which of the following courses of action would you recommend to the firm?

Accepted Answer

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

Question 5

The further in the future a payment is received, the more it is worth today.

Accepted Answer

A) True 
 B)False

Question 6

You win a lottery that pays $10,000 each year for the next 5 years beginning next year. How much are your winnings worth today?

Accepted Answer

A)  $50,000 
B)  $45,455 
C)  $10,000 
D)  indeterminate with the given information

Question 7

________ is an example of intangible capital.

Accepted Answer

A)  Inventory 
B)  "Goodwill" 
C)  Computer software 
D)  A public library

Question 8

One of the most important forms of capital income is

Accepted Answer

A)  depreciation. 
B)  rent. 
C)  wages. 
D)  profits.

Question 9

You borrow $20,000 at an interest rate of 6% to open Candy Dan's, a gourmet sweet shop. You will earn an economic profit if the return on your investment is

Accepted Answer

A)  between 0 and 6%. 
B)  6%. 
C)  greater than 6%. 
D)  only greater than 10%.

Question 10

Assume the current interest rate is 20%. The present value of $500 in one year would be

Accepted Answer

A)  $180. 
B)  $417. 
C)  $750. 
D)  $1,083.

Question 11

The added return an investor needs to compensate for the risks of future payments is called a(n)

Accepted Answer

A)  present discounted value. 
B)  marginal risk product. 
C)  internal rate of return. 
D)  risk premium.

Question 12

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 $600 in interest.

Accepted Answer

A)  $60 
B)  $660 
C)  $6,000 
D)  $6,600

Question 13

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

Accepted Answer

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 14

In the economy as a whole, lower interest rates are likely to ________ investment and higher interest rates are likely to ________ investment.

Accepted Answer

A)  stimulate; slow 
B)  slow; stimulate 
C)  stimulate; stop 
D)  stop; stimulate

Question 15

There is an opportunity cost associated with

Accepted Answer

A)  only investments made with borrowed funds. 
B)  only investments made with retained earnings. 
C)  only investments made with funds received from the sale of new bonds. 
D)  every investment project, no matter how it is funded.

Question 16

Economists use the term ________ to refer to the creation of new capital.

Accepted Answer

A)  investment 
B)  entrepreneurship 
C)  depreciation 
D)  finance

Question 17

Assume the current interest rate is 25%. The present value of $1,000 in one year would be

Accepted Answer

A)  $180. 
B)  $450. 
C)  $750. 
D)  $800.

Question 18

Capital goods yield benefits

Accepted Answer

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 19

Dynaflex Corp. is considering an investment project that costs $900 today. It expects the project will yield income of $350 at the end of years 1, 2, and 3. If the interest rate is 10%, the firm

Accepted Answer

A)  should undertake the investment. 
B)  should forgo the investment. 
C)  is just indifferent between undertaking the investment and not. 
D)  indeterminate from the given information

Question 20

Refer to the data provided in Table 11.1 below to answer the following question(s).
Table 11.1 $$\begin{array}{l}
\begin{array} { l c c } 
&\text { Total Investment }&\text {Expected Rate of Return }\
 { \text { Project } } & \text { (dollars) } & \text { (percentage) } \
\hline \text { New tablet computer for sales staff } & \$ 500,000 & 22 \
\text { Remodel for distribution center } & \$ 400,000 & 18 \
\text { On-site day care center } & \$ 200,000 & 10 \
\text { Employee fitness center } & \$ 100,000 & 8
\end{array}
\end{array}$$
-Refer to Table 11.1. If the interest rate is 28%, Nashbar Bicycle should

Accepted Answer

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 tablet computers for its sales staff. 
D)  not fund any of the projects.

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