Question 1

Which of the following represents an uninsurable risk to a business firm?

Accepted Answer

A)  the possibility that its warehouse will burn down
B)  the possibility that several of its workers will be injured at work
C)  the possibility that an adverse change in consumer tastes will decrease the demand for the firm's product
D)  the possibility that a tornado will damage the plant and stop production for a monthE) C) and D)
F) A) and C)

Question 2

If the interest rate is 10 percent, what is the present value of $25,000 received two years from now?

Accepted Answer

A)  $20,000
B)  $20,661
C)  $30,250
D)  $30,000E) B) and C)
F) A) and D)

Question 3

Which factor will decrease the demand for loanable funds?

Accepted Answer

A)  a change in the tax law to exempt savings from taxation
B)  expansion of social insurance to cover more fully the cost of retirement
C)  a general business recession that produces high rates of unemployment
D)  a technological advance that increases returns on investmentsE) B) and D)
F) All of the above

Question 4

In what way are entrepreneurs residual claimants?

Accepted Answer

The entrepreneur is a residual claimant,...

Question 5

Most borrowers value money for

Accepted Answer

A)  its own sake.
B)  what it can buy.
C)  what it can produce.
D)  what they have to pay for it.E) A) and D)
F) None of the above

Question 6

The XYZ Corporation determines it can make a real (inflation-adjusted) return on an investment of 9 percent. The nominal rate of interest is 13 percent and the rate of inflation is 7 percent. We can conclude that the

Accepted Answer

A)  investment will be profitable.
B)  investment will be unprofitable.
C)  real rate of interest is 4 percent.
D)  real rate of interest is 2 percent.E) A) and D)
F) None of the above

Question 7

What line in the graph would best represent the supply curve for land?

Accepted Answer

A)  1
B)  2
C)  3
D)  4E) A) and C)
F) B) and C)

Question 8

David Ricardo, a nineteenth-century economist, wrote, "The price of corn is high not because a rent is paid, but a rent is paid because the price of the corn is high." Which of the following correctly explains Ricardo's assertion?

Accepted Answer

A)  The high rents landowners charge tenant farmers cause high corn prices.
B)  If landowners weren't so greedy and lowered the rents they charge tenant farmers, the price of corn would fall.
C)  If the price of corn rises because of increased demand for corn, land rents will rise to absorb most of the extra revenue received by tenant corn farmers.
D)  If the price of corn rises, all other things being equal, increases in rent will cause some tenant farmers to stop growing corn.E) None of the above
F) A) and D) C

Question 9

If the nominal rate of interest is 8 percent and the real rate of interest is 3 percent, the inflation rate must be 11 percent.

Accepted Answer

A) True 
 B)False

Question 10

In making an investment decision, a business firm is most interested in the

Accepted Answer

A)  nominal interest rate.
B)  real interest rate.
C)  nominal interest rate minus the real interest rate.
D)  future supply of loanable funds.E) A) and C)
F) A) and B)

Question 11

The interest rate is the price paid for the use of money.

Accepted Answer

A) True 
 B)False  True

Question 12

Refer to the diagram. Suppose that the demand for loanable funds is D ₁ and the supply of loanable funds initially is S ₀ . If the supply of loanable funds declines to S ₁, the equilibrium quantity of funds borrowed will

Accepted Answer

A)  decrease from G to F.
B)  increase from E to F.
C)  increase from B to C.
D)  decrease from B to A.E) A) and B)
F) A) and C)

Question 13

Investment and R&D decisions by firms are based on nominal interest rates, not real interest.

Accepted Answer

A) True 
 B)False

Question 14

The pure rate of interest is approximated by the

Accepted Answer

A)  rate that savings and loan associations charge on mortgage loans.
B)  rate charged consumers by credit card companies.
C)  rate paid on long-term government bonds.
D)  announced rate at which commercial banks make business loans.E) B) and C)
F) All of the above

Question 15

The aggregate economic rent received by a productive resource will decrease, ceteris paribus, whenever the

Accepted Answer

A)  demand for the resource increases.
B)  price of the resource decreases.
C)  demand for the resource decreases.
D)  supply curve shifts to the right.E) A) and C)
F) A) and D)

Question 16

Other things equal, the interest rate on a loan will be smaller,

Accepted Answer

A)  the greater the risk involved.
B)  the smaller the amount of the loan.
C)  the longer the length of the loan.
D)  if the loan interest is exempt from taxation.E) All of the above
F) None of the above

Question 17

Which of the following statements about interest rates is false?

Accepted Answer

A)  Interest rates typically reflect the risk involved in extending a loan.
B)  Interest rates are affected by households' spending decisions.
C)  The equilibrium interest rate is determined by the intersection of the supply and demand schedules for loanable funds.
D)  The supply of loanable funds is independent of the rate of interest.E) All of the above
F) A) and B)

Question 18

The schedule shows various interest rates, the associated quantity demanded of loanable funds, and the quantity supplied of loanable funds in billions of dollars at those interest rates. What is the equilibrium interest rate?

Accepted Answer

A)  4 percent
B)  6 percent
C)  8 percent
D)  10 percentE) B) and C)
F) All of the above

Question 19

Entrepreneurs mostly focus on a single number: profits. As a result, which of the following statements tends to be true about their firms?

Accepted Answer

A)  The firms tend to do well in some aspects of their operations, but other aspects are neglected.
B)  The firms cannot achieve a very high overall efficiency.
C)  The firms pay close attention to every aspect of their operations.
D)  The firms' suppliers and customers are often left behind.E) None of the above
F) A) and B)

Question 20

The marginal revenue product (MRP) of land declines as more land is brought into production because

Accepted Answer

A)  land is a "free and nonreproducible gift of nature."
B)  of diminishing returns.
C)  land rent has no incentive function.
D)  the supply of land is fixed.E) A) and B)
F) None of the above B

Exam 18: Rent, Interest, and Profit

Which of the following represents an uninsurable risk to a business firm?

Correct AnswerverifiedShow Answer

If the interest rate is 10 percent, what is the present value of $25,000 received two years from now?

Correct AnswerverifiedShow Answer

Which factor will decrease the demand for loanable funds?

Correct AnswerverifiedShow Answer

In what way are entrepreneurs residual claimants?

Correct AnswerverifiedThe entrepreneur is a residual claimant,...View AnswerShow Answer

Most borrowers value money for

Correct AnswerverifiedShow Answer

The XYZ Corporation determines it can make a real (inflation-adjusted) return on an investment of 9 percent. The nominal rate of interest is 13 percent and the rate of inflation is 7 percent. We can conclude that the

Correct AnswerverifiedShow Answer

What line in the graph would best represent the supply curve for land?

Correct AnswerverifiedShow Answer

David Ricardo, a nineteenth-century economist, wrote, "The price of corn is high not because a rent is paid, but a rent is paid because the price of the corn is high." Which of the following correctly explains Ricardo's assertion?

Correct AnswerverifiedC

If the nominal rate of interest is 8 percent and the real rate of interest is 3 percent, the inflation rate must be 11 percent.

Correct AnswerverifiedShow Answer

In making an investment decision, a business firm is most interested in the

Correct AnswerverifiedShow Answer

The interest rate is the price paid for the use of money.

Correct AnswerverifiedTrue

Refer to the diagram. Suppose that the demand for loanable funds is D ₁ and the supply of loanable funds initially is S ₀ . If the supply of loanable funds declines to S ₁, the equilibrium quantity of funds borrowed will

Correct AnswerverifiedShow Answer

Investment and R&D decisions by firms are based on nominal interest rates, not real interest.

Correct AnswerverifiedShow Answer

The pure rate of interest is approximated by the

Correct AnswerverifiedShow Answer

The aggregate economic rent received by a productive resource will decrease, ceteris paribus, whenever the

Correct AnswerverifiedShow Answer

Other things equal, the interest rate on a loan will be smaller,

Correct AnswerverifiedShow Answer

Which of the following statements about interest rates is false?

Correct AnswerverifiedShow Answer

The schedule shows various interest rates, the associated quantity demanded of loanable funds, and the quantity supplied of loanable funds in billions of dollars at those interest rates. What is the equilibrium interest rate?

Correct AnswerverifiedShow Answer

Entrepreneurs mostly focus on a single number: profits. As a result, which of the following statements tends to be true about their firms?

Correct AnswerverifiedShow Answer

The marginal revenue product (MRP) of land declines as more land is brought into production because

Correct AnswerverifiedB

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The entrepreneur is a residual claimant,...
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C

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True

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B