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| 1 | |
A firm will employ real capital to the point where |
| | A) | the return on the capital is equal to the rental rate at which the firm could rent the capital. |
| | B) | the return on the capital is equal to the interest rate at which the firm can borrow money. |
| | C) | the marginal revenue product equals the purchase price of the capital. |
| | D) | the rental rate equals the market interest rate. |
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| 2 | |
If the price of a machine is $100, annual maintenance on the machine is $15, the machine's useful life is five years, there is no technological change in this area, and the market interest rate is 10%, how much will it cost to rent this machine? |
| | A) | $10/year |
| | B) | $15/year |
| | C) | $30/year |
| | D) | $45/year |
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| 3 | |
If the scrap value of a $1000 machine you intend to buy will be $100 in two years, what will you do with that information as you decide whether or not to buy today? |
| | A) | Subtract $100 form the present cost. |
| | B) | Add approximately $91 to the cost of the machine. |
| | C) | Subtract approximately $91 from the cost of the machine. |
| | D) | Subtract approximately $82.6 from the cost. |
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| 4 | |
A firm buys a $1000 machine that earns $600/year in profit for two years after which it collapses in a worthless heap. No maintenance costs or technology change exists for this machine. If the interest rate is 12% the firm made a |
| | A) | good decision to buy. |
| | B) | bad decision to buy. |
| | C) | neither a good nor a bad decision to buy since it breaks even in the deal. |
| | D) | decision that we cannot judge without more information. |
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| 5 | |
Which statement is false? |
| | A) | If a firm has 5 machines but wishes it had 6, then the value of one machine would be the firm's demand for loanable funds. |
| | B) | Consumer's desire to borrow for a house is part of the demand for loanable funds. |
| | C) | Government borrowing does not constitute a demand for loanable funds since loanable funds markets include only private money flows. |
| | D) | Corporate retained earnings, consumer savings and foreign money seeking US safety and high rates of return are all part of the supply of loanable funds. |
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| 6 | |
Which of the following questions is the least worthwhile question to ask of your broker? |
| | A) | Given my tax circumstance, should I consider municipal bonds or stock for my new investments? |
| | B) | Which blue chip stocks would be the best buy for me now? |
| | C) | I am taking my retirement money in a lump sum and want to have income as well as growth of my assets. Which mutual funds offer the balance that I need? |
| | D) | I need to reduce the risk in my investment portfolio, How should I do that? |
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| 7 | |
A municipal tax-free bond |
| | A) | is more attractive to a rich person than to a poor person. |
| | B) | complicates the simple theory of efficient market allocation of investments because everyone has a different tax situation. |
| | C) | falls in value when the interest rate falls. |
| | D) | has a higher rate of interest than a treasury bill. |
| | E) | is described in part by none of the above. |
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| 8 | |
Economic rent is the same as what concept we have used many times earlier in the course? |
| | A) | producer surplus |
| | B) | consumer surplus |
| | C) | economic profit |
| | D) | value of the marginal product. |
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| 9 | |
The rental rate of capital includes |
| | A) | a charge for maintenance of real capital. |
| | B) | the opportunity cost of money needed to buy real capital. |
| | C) | a charge for technological obsolescence. |
| | D) | all of the above. |
| | E) | a and b but not c. |
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| 10 | |
In the discounting of future dollars to arrive at the present value of a machine the present value will go down if |
| | A) | the interest rate falls. |
| | B) | the revenue stream is realized earlier than expected. |
| | C) | maintenance costs in the earlier periods are reduced and they are increased by the same amount in a later period. |
| | D) | the scrap value is decreased. |
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| 11 | |
If you are holding a bond it is to your advantage if |
| | A) | the market interest rate rises. |
| | B) | the market interest rate falls. |
| | C) | Inflation increases. |
| | D) | The demand for stocks goes up and the demand for bonds goes down. |
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| 12 | |
The theory for capital markets and labor markets is similar except that |
| | A) | capital by its nature is long run in character while labor can be easily varied in the short run. |
| | B) | the time dimension and discounting is important for capital and not for labor. |
| | C) | capital depreciates but labor improves with experience. |
| | D) | capital expenditures are sunk costs and labor costs are not sunk costs. |
| | E) | all of the above are differences in the character of the two inputs. |
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| 13 | |
Consumers supply savings to the loanable funds market if |
| | A) | the interest rate rises and the substitution effect that encourages savings outweighs an income effect that sometimes works in the opposite direction. |
| | B) | the interest rate rises and the substitution effect that discourages saving is offset by the income effect which encourages savings. |
| | C) | the interest rate falls and the substitution effect that encourages savings is not offset by an income effect that discourages savings. |
| | D) | both a and c occur. |
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| 14 | |
Because capital markets are highly efficient |
| | A) | any stock purchased will have the same expected rate of return. |
| | B) | one company that is twice as productive as another company will have a stock price only half as high as the less productive company. |
| | C) | investment newsletters are necessary for any novice tying to invest. |
| | D) | better managed companies have much higher rates of return to the investor. |
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| 15 | |
Which statement is true about tax policy and the capital market? |
| | A) | Returns from municipal bonds are taxed more heavily than corporate bonds making it more difficult for local governments to raise funds. |
| | B) | Depreciation allowances lower taxes because they reduce the stated profits of firms. |
| | C) | Capital gains are taxed at higher rates than wage income. This lowers the effective rate of return on capital. |
| | D) | All of the above are true. |
| | E) | None of the above are true. |
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| 16 | |
Suppose that the market for machines is defined by the demand curve P = 10 – Q and the supply curve is P = 2 + Q. How much economic rent is being transferred in the market? |
| | A) | 24 |
| | B) | 16 |
| | C) | 50 |
| | D) | 18 |
| | E) | 8 |
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| 17 | |
If the supply curve in question above were vertical at a quantity of 4, how much economic rent would exist in the market? |
| | A) | 24 |
| | B) | 16 |
| | C) | 50 |
| | D) | 18 |
| | E) | 32 |
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| 18 | |
The following two questions relate to the information given here. An airport limo service has an average total cost of 30 per trip. This covers the full opportunity cost of the operations. For every 5 trips during the peak hours and for every five trips during the off peak hours the firm must own one limo in order to effectively cover the demand. It faces a peak consumer demand of P = 60 – Q and an off peak demand of P = 30 – Q. Sketch the demand curves for easier reference. If it prices at ATC and serves the market at that price, how many rides will be produced and how much revenue will the firm take in? |
| | A) | 0, 0 |
| | B) | 15, 450 |
| | C) | 30, 900 |
| | D) | 60, 1800 |
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| 19 | |
If the firm priced peak demand at 45 and off peak demand at 15, how many rides would it sell and how much revenue would be received? Finally, would profits expect to increase, decrease, or stay the same? |
| | A) | 0, 0, decrease |
| | B) | 15, 450, increase |
| | C) | 30, 900, increase |
| | D) | 60, 1800, decrease |
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| 20 | |
Since capital markets deal with products that produce over time, there are risks that are inevitable in making decisions. Higher expected return and lower risk are tradeoffs that must be made. Which of the following will lead to the most conservative investment strategy for an individual? Assume a graphical space with expected return on the vertical axis and safety on the horizontal axis. |
| | A) | An investor has a steep indifference curve with respect to the horizontal axis. |
| | B) | An investor has a flat indifference curve with respect to the horizontal axis. |
| | C) | An investor has a low marginal rate of substitution of safety for expected return. |
| | D) | Both a and c are correct. |
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