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

Question 1

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

Answer 1

indirectly; capital

Question 2

A motorcycle manufacturer produced 8,000 motorcycles, but sold only 6,500 of them. We would classify the remaining 1,500 motorcycles as

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

Answer 2

part of the firmʹs tangible capital.

Question 3

The measure of a firm's capital stock is the ________ its plant, equipment, inventories, and intangible assets.

A) value it paid for
B) depreciable value of
C) current market value of
D) quantity of

Answer 3

current market value of

Question 4

Firms that offer to pay for professional development for their employees are investing in ________ capital.

A) human
B) productive
C) social
D) None of the above are correct.

Question 5

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 6

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 7

An example of intangible capital is

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

Question 8

________ is an example of tangible capital.

A) A pet store's unsold, unopened bags of dog food
B) An idea for a new business
C) The goodwill a firm has established through charitable giving
D) Knowledge of how to operate a forklift

Question 9

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.

Question 10

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 11

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 12

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 13

As the inventory of a firm rises

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

Question 14

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 15

"Goodwill" is an example of

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

Question 16

A firm's ________ is measured as a stock while ________ is measured as a flow.

A) investment in new capital; capital
B) capital; investment in new capital
C) current labor force; current inventory
D) planned inventory; current inventory

Question 17

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 18

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

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

Question 19

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 20

Nonresidential structures, durable equipment, residential structures, and inventories are the major categories of

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

Question 21

A company requires that all new employees become certified in using Microsoft Office. This investment is in ________ capital.

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

Question 22

Human capital is a type of social capital.

Question 23

China has invested heavily in turbine manufacturing and in 2009 had become the world's largest wind power market. Capital that provides services to the public, like energy derived from wind power, is known as

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

Question 24

Infrastructure is capital that provides services to the public.

Question 25

Nonresidential structures are examples of physical capital.

Question 26

________ is an example of intangible capital.

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

Question 27

An example of ________ is an internship program.

A) tangible capital
B) social capital
C) infrastructure
D) intangible capital

Question 28

Capital stock is defined as the retail value that was paid for a firm's productive assets.

Question 29

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

Question 30

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

Question 31

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

Question 32

Goodwill is a type of tangible capital.

Question 33

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 34

A worker's skills and knowledge are types of social capital.

Question 35

Participating in a seminar that helps to improve your performance at work represents an investment in your ________ capital.

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

Question 36

Infrastructure, such as public works and public services, is also referred to as

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

Question 37

Residential structures and inventories are examples of tangible capital.

Question 38

China has invested heavily in turbine manufacturing and in 2009 had become the world's largest wind power market. The investment in turbine manufacturing is an example of ________ investment.

A) intangible capital
B) human capital
C) tangible capital
D) social capital

Question 39

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 40

Physical capital refers to material things used as inputs in the production of future goods and services.

Question 41

Refer to the information provided in Figure 11.1 below to answer the question(s) that follow. Figure 11.1
Refer to Figure 11.1. If the market rate of interest is 8%, this firm's investment will total

A) $5,000.
B) $7,000.
C) $12,000.
D) $15,000.

Question 42

Refer to the data provided in Table 11.2 below to answer the following question(s).
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. When the interest rate ________, the farmer will engage in no investment.

A) is greater than 15%
B) is less than 5%
C) is less than 15%
D) is greater than 5%

Question 43

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 44

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 20%, Nashbar Bicycle should

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

Question 45

Refer to the information provided in Figure 11.1 below to answer the question(s) that follow. Figure 11.1
Refer to Figure 11.1. If the market rate of interest is 5%, this firm's investment will total

A) $5,000.
B) $8,000.
C) $15,000.
D) $27,000.

Question 46

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 47

Refer to the data provided in Table 11.2 below to answer the following question(s).
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. When the interest rate ________, the farmer will investment in all four projects.

A) is greater than 15%
B) is less than 5%
C) is less than 15%
D) is greater than 5%

Question 48

Refer to the data provided in Table 11.2 below to answer the following question(s).
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.

Question 49

Refer to the data provided in Table 11.2 below to answer the following question(s).
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 50

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 9%, Nashbar Bicycle's total investment would be

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

Question 51

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

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.

Question 52

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 53

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

-Ceteris paribus, when market interest rates ________, ________ investment projects are undertaken.

A) decrease; more
B) increase; more
C) decrease; less
D) increase; no

Question 54

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 decrease 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 lower the price of digital cameras in response to the expected decrease in the demand.
B) Suggest that decreasing investment in new capital to produce digital cameras occur only after it can be verified that the birthrate has decreased.
C) Start to decrease investment now so that when the birthrate decreases and the demand for digital cameras decreases, the firm will not have excess inventories due to the decrease in demand.
D) Suggest that the firm increase its advertising to avert a substantial decrease in demand for digital cameras.

Question 55

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 56

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 57

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 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 58

Refer to the information provided in Figure 11.1 below to answer the question(s) that follow. Figure 11.1
Refer to Figure 11.1. If the market rate of interest is 10%, this firm's investment will total

A) $0.
B) $5,000.
C) $7,000.
D) $15,000.

Question 59

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 20%, Nashbar Bicycle's total investment would be

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

Question 60

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 25%, Nashbar Bicycle's total investment would be

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

Question 61

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?

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 62

A firm can invest in one of two projects: the purchase of new manufacturing equipment or the training of its factory workers in the better use of time management. Both projects cost the same amount of money. The purchase of new manufacturing equipment is expected to reduce costs by $10,000 each year for 5 years. The training of the factory workers in the better use of time management is expected to increase revenues by $10,000 each year for 10 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 purchase of new manufacturing equipment would have the higher expected rate of return, as it reduces costs whereas the training of factory workers in the better use of time management only increases revenues.
C) The training of factory workers would have the higher expected rate of return, as it will increase revenues for a longer time period than the purchase of new manufacturing equipment will reduce costs.
D) The expected rates of return for these two projects cannot be compared, as one project reduces costs and the other increases revenues.

Question 63

The most important dimension of capital is

A) immediate returns.
B) depreciation.
C) the interest rate.
D) time.

Question 64

If future benefits are underestimated by a firm,

A) the firm will invest too much in capital.
B) the firm will use only retained earnings to invest in capital.
C) the firm will invest too little in capital.
D) the firm will only sell bonds to invest in capital.

Question 65

As interest rates fall, a firm would

A) have higher expected costs of investment.
B) have decreasing present value of expected earning.
C) be willing to pay less now to purchase the same number of future dollars.
D) be willing to pay more now to purchase the same number of future dollars.

Question 66

You borrow $75,000 at an interest rate of 3% to open Spinners, a bicycle shop. You will earn an economic profit if the return on your investment is

A) greater than 3%.
B) 3%.
C) between 0 and 3%.
D) 6% or less.

Question 67

In general, a firm will be likely to invest as long as the

A) interest rate is less than the inflation rate.
B) firm doesn't have to borrow any money to make the investment.
C) profits realized from the investment are sufficient to cover the interest payments.
D) firm can sell bonds directly to the public instead of borrowing from a bank.

Question 68

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, 12%; computer training for its office staff, 9%; and defensive driving training for its drivers, 8%. If the current interest rate is 7%, 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.
D) none of the projects.

Question 69

The quantity of investment demanded by firms

A) is inversely related to the interest rate.
B) is directly related to the interest rate.
C) is unrelated to the interest rate.
D) is positively related to the level of uncertainty.

Question 70

All else equal, more investment takes place at

A) higher market interest rates.
B) lower market interest rates.
C) higher nominal interest.
D) higher real interest rates.

Question 71

The firm should continue investing

A) even if the MRP_K is equal to its rental cost.
B) only as long as the MRP_K is less than its rental cost.
C) up to the point where the MRP_K equals its rental cost.
D) only as long as its rental cost is greater than the interest rate.

Question 72

Suppose that an international incident occurs that creates uncertainty in the market. It is likely that this incident will ________ the level of private investment spending.

A) decrease
B) increase
C) neutralize
D) not affect

Question 73

An investment should be undertaken

A) if the present value of the expected income stream associated with the investment is greater than the full cost of the investment project.
B) if the present value of the expected income stream associated with the investment is less than the full cost of the investment project.
C) any time the present value of the expected income stream associated with the investment is positive.
D) if the present value of the costs of the investment project exceed the present value of the expected returns from the investment project.

Question 74

Refer to the data provided in Table 11.3 below to answer the following question(s).
Table 11.3
Project Total Investment Expected Rate of Return
(dollars) (percentage)
$$\begin{array} { l l r } \text { New computer for sales staff } & \$ 250,000 & 11 \\\text { Remodel for distribution center } & \$ 200,000 & 9 \\\text { On-site day care center } & \$ 100,000 & 5 \\\text { Employee fitness center } & \$ 50,000 & 4\end{array}$$

-Refer to Table 11.3. If the interest rate is 14%, Blackstar Drone Manufacturing 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 computers for its sales staff.
D) not fund any of the projects.

Question 75

There is an opportunity cost associated with

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 76

As interest rates rise, a firm would

A) have lower expected costs of investment.
B) have increasing present value of expected earning.
C) be willing to pay less now to purchase the same number of future dollars.
D) be willing to pay more now to purchase the same number of future dollars.

Question 77

If business leaders expect the new Congress to lower the corporate profits tax, most likely this will cause business firms, ceteris paribus, to

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

Question 78

Refer to the information provided in Figure 11.1 below to answer the question(s) that follow. Figure 11.1
Refer to Figure 11.1. If the market rate of interest is < 5%, this firm's investment will total

A) $0.
B) < $5,000.
C) $7,000.
D) > $15,000.

Question 79

Suppose that a normal rate of return in the economy is 10% and the rate of return being earned by firms in a competitive industry equals exactly 10%. Which of the following is a correct prediction based on this information?

A) New firms will want to enter this industry, as the existing firms are earning an economic profit.
B) Firms already in the industry will want to expand to try to increase their rate of return.
C) Firms in the industry will not undertake any investment projects other than to replace depreciating capital stock.
D) The industry size will contract.

Question 80

Suppose that the normal rate of return in the inkjet printer industry is 10% and the return being earned by firms in this industry equals exactly 5%. Which of the following is likely to follow from this scenario?

A) Firms will collude to keep competition out.
B) New firms will want to enter the industry.
C) Firms will want to leave the industry.
D) The normal rate of return will fall to 5% in the long run.