Deck 17: Interest, Rent, and Profit

Question 1

The addition to total output when one more unit of capital is added is called the marginal revenue product of capital.

Answer 1

False

Question 2

The MRP = MFC maximization rule applies to capital just as it does to labor.

Answer 2

True

Question 3

It is easy for a firm to change the capital equipment it is using in the short run by going to the loanable funds market.

Answer 3

False

Question 4

An increase in the marginal physical product of capital increases the demand for loanable funds.

Question 5

Many economists believe that suppliers of loanable funds have property rights to those funds, similar to the way that a person of with extraordinary intelligence or physical abilities has property rights to their intellectual or physical attributes.

Question 6

If the annual return on a property is $30,000, and the interest rate is 20 percent, the present value is $6,000.

Question 7

If the interest rate rises, the present value of property rises because the return is now higher.

Question 8

A government-imposed price floor in the tobacco market will raise the value of land used to grow tobacco.

Question 9

The difference between what a productive resource receives as payment for its use in production and the cost of bringing that resource to the market is called profit.

Question 10

If a job applicant had been willing to work for $10 an hour, but the employer pays her $18 an hour, the worker earns wage-related rent of $8 an hour.

Question 11

The federal government's support of farm prices in the United States has affected the value of farm property.

Question 12

The right to earn interest is the incentive that motivates people to supply loanable funds to the loanable funds market.

Question 13

Rents can be derived from any factor used in production.

Question 14

Senior managers of a corporation can be regarded as the corporation's entrepreneurs.

Question 15

Profit-related income does not play any crucial role in the workings of a market system.

Question 16

Marxists believe that interest income is justifiable because it discourages present consumption.

Question 17

An increase in the interest rate would reduce the present value of a property

Question 18

Loanable funds are the physical equivalent to capital equipment.

Question 19

Wage-related rents are derived in the same way that land rents are derived.

Question 20

The marginal revenue product of land is a downward sloping relationship due to the law of diminishing returns.

Question 21

A factor of production with unique attributes is able to command a scarcity rent determined by market demand.

Question 22

Aaron Rogers, football quarterback with the Green Bay Packers, signed a contract for roughly $100 million. Favre would be willing to play for only $100,000. An economist would argue that Favre is receiving $900,000 in wage-related rent.

Question 23

Rent is what entrepreneurs earn, but it is called profit to distinguish it from other forms ofrent.

Question 24

If the rate of interest is fixed, the MFC of capital is equal to the interest rate.

Question 25

Labor is the only resource that cannot earn rent.

Question 26

Profit is a guaranteed return to the entrepreneur.

Question 27

The demand curve for loanable funds slopes downward because of diminishing returns.

Question 28

If the rate of interest is fixed, a profit-maximizing firm will employ capital up to the quantity where MRP = interest rate.

Question 29

If the rate of interest increases, the demand for loanable funds will decrease.

Question 30

An increase in the supply of loanable funds will decrease the rate of interest.

Question 31

Interest rates and the present value of a physical or financial asset are inversely related, that is, when one increases, the other decreases.

Question 32

Market interest rates are determined solely by people's willingness to loan funds, that is, their rate of time preference.

Question 33

Market equilibrium rates of interest are rarely expected to approximate efficient interest rates between willing transactors of exchange.

Question 34

The returns from productive capital investment are determined by interest rates.

Question 35

Discounting is a process of turning a stream of future returns into a present dollar equivalent.

Question 36

If Sam sells his product for $10 per unit net of costs and just breaks even after transporting it 5 miles to the market, Susan, who lives only 2 miles from the market will

A) experience lower profits
B) earn a location rent
C) find it profitable to purchase Sam's land
D) derive a consumer's surplus
E) none of the above

Question 37

Property values are determined by

A) the interest rate and expected annual revenues from the property, both present and future
B) the value of the expected annual revenues from the property, both present and future, and the rate of inflation
C) the opportunity cost of the property
D) the present (this year only) revenue generated by the property
E) the demand side only since the supply of the property is already fixed

Question 38

Farm programs that guarantee a price higher than equilibrium

A) cause shortages
B) decrease government spending
C) decrease taxes
D) raise farm property values
E) increase suburban development

Question 39

To derive the marginal physical product of capital,

A) all other resources must be held fixed
B) capital must be held fixed
C) all resources, including capital, must be held fixed
D) all resources are variable
E) output must be held fixed

Question 40

The MRP of capital is defined as the

A) output produced by employing one more dollar of loanable funds
B) total cost attributed to employing one more unit of physical equipment
C) contribution of capital to the production of the good
D) change in capital required to produce one more unit of output
E) change in total revenue that results from adding an additional dollar of loanable funds to production

Question 41

The MRP of capital is measured by the change in

A) total output/change in loanable funds
B) marginal physical product/change in loanable funds
C) total revenue/change in loanable funds
D) loanable funds/change in total revenue
E) total output/change in total capital

Question 42

The MPP of capital is defined as the

A) change in total output divided by the change in loanable funds
B) change in loanable funds divided by the change in total output
C) contribution of loanable funds to the final product
D) change in total cost attributed to employing one more unit of loanable funds
E) change in output generated by employing one more unit of loanable funds

Question 43

-In Exhibit Q-1, the MPP of the tenth unit of capital (or loanable funds) is equal to

A) 65 units of output
B) 85 units of output
C) 20 units of output
D) 15 units of output
E) 80 units of output

Question 44

-In Exhibit Q-1, the MPP of the 12th unit of capital (or loanable funds) is

A) 120 units of output
B) 113 units of output
C) 13 units of output
D) 7 units of output
E) 80 units of output

Question 45

-In Exhibit Q-1, diminishing returns sets in when the ______ unit of capital (or loanablefunds) is hired.

A) 9th
B) 10th
C) 11th
D) 12th
E) 13th

Question 46

-In Exhibit Q-1, if price is $7, then the MRP of the ninth unit of capital (or loanable funds)is

A) $13
B) $15
C) $20
D) $105
E) $140

Question 47

-In Exhibit Q-1, if price is $6, then the MRP of the 11th unit of capital (or loanable funds)is

A) $13
B) $113
C) $678
D) $105
E) $78

Question 48

Considering capital, marginal factor cost is defined as the

A) extra output produced by employing one more unit of capital (or loanable funds)
B) extra total cost attributed to employing one more unit of capital (or loanable funds)
C) contribution of capital (or loanable funds) to the final product
D) change in capital (or loanable funds) required to produce one more unit of output
E) change in total revenue contributed by an extra unit of capital (or loanable funds)

Question 49

-In Exhibit Q-2, if price of the good is $5, the price of a unit of the physical capital used inproduction (shown in column 1) is $450, and the interest rate on loanable funds is 10percent, then the quantity demanded of physical capital is

A) 2 units
B) 3 units
C) 4 units
D) 5 units
E) 6 units

Question 50

-In Exhibit Q-2, if price of the good is $5, the price of a unit of the physical capital used inproduction (shown in column 1) is $700, and the interest rate of loanable funds is 10percent, the quantity demanded of physical capital is

A) 2 units
B) 3 units
C) 4 units
D) 5 units
E) 6 units

Question 51

-In Exhibit Q-2, if price of the good is $8, the price of a unit of the physical capital used inproduction (shown in column 1) is $800, and the interest rate of loanable funds is 5percent, the quantity demanded of physical capital is

A) 0 units
B) 1 units
C) 3 units
D) 4 units
E) 5 units

Question 52

-In Exhibit Q-2, if price of the good is $8, the price of a unit of the physical capital used inproduction (shown in column 1) is $800, and the interest rate of loanable funds is 17percent, the quantity demanded of physical capital is

A) 0 units
B) 1 units
C) 3 units
D) 4 units
E) 5 units

Question 53

When the price of a good increases, the quantity demanded of loanable funds ______.When the interest rate increases, the quantity demanded of loanable funds ______. Whenthe interest rate increases, the quantity supplied of loanable funds ______.

A) decreases, decreases, decreases
B) increases, decreases, decreases
C) increases, decreases, increases
D) decreases, increases, increases
E) increases, increases, increases

Question 54

If the rate at which one can borrow loanable funds is fixed at 8 percent, the marginal factor cost of employing 8 units of loanable funds is

A) zero
B) 64 percent
C) 8 percent
D) 1 percent
E) unable to determine with this information

Question 55

If a firm's MRP of capital > MFC, the firm should

A) lower the interest rate
B) decrease its quantity demanded of loanable funds
C) increase its quantity demanded of loanable funds
D) hire more labor
E) raise the interest rate

Question 56

If a firm's MRP of capital < MFC, the firm should

A) lower the interest rate
B) decrease its quantity demanded of loanable funds
C) increase its quantity demanded of loanable funds
D) hire more labor
E) raise the interest rate

Question 57

If a firm's MRP of capital = MFC, the firm

A) is at its profit-maximizing use of loanable funds
B) should decrease its quantity demanded of loanable funds
C) should increase its quantity demanded of loanable funds
D) should hire more labor
E) should raise the interest rate

Question 58

When the rate of interest (or price of capital) increases, the

A) quantity demanded of loanable funds by the firm will decrease
B) quantity demanded of loanable funds by the firm will increase
C) firm's MRP of capital increases
D) firm's MPP of capital increases
E) firm's MRP of capital decreases

Question 59

When the rate of interest (or price of capital) decreases, the

A) quantity demanded of loanable funds by the firm will decrease
B) quantity demanded of loanable funds by the firm will increase
C) firm's MRP of capital increases
D) firm's MPP of capital increases
E) firm's MRP of capital decreases

Question 60

If the productivity of capital increases, the

A) supply curve of capital shifts to the right
B) interest rate decreases
C) firm's MRP of capital increases
D) firm's MRP of capital decreases
E) marginal factor cost decreases

Question 61

The quantity supplied of loanable funds

A) is inversely related to the rate of interest
B) is directly related to the rate of interest
C) affects a firm's MRP of capital
D) affects a firm's MPP of capital
E) affects the price of the good

Question 62

The reward that lenders of loanable funds receive for delaying consumption and supplying loanable funds to the loanable funds market is called the

A) marginal factor cost
B) loanable funds
C) wage-related rent
D) interest rate
E) marginal revenue product

Question 63

The rate of interest is determined by the

A) quantity of money available on the market
B) supply and demand for loanable funds
C) marginal factor cost of capital
D) firm's MRP and the price of the good
E) firm's MPP and the price of the good

Question 64

-Exhibit Q-3 shows the market for loanable funds. The demand curve for loanable funds isequivalent to the firms' __________.

A) MFC of capital
B) interest rate
C) equipment capital
D) MRP of capital
E) wage-related rent

Question 65

-In Exhibit Q-3, at a rate of interest of 13 percent, there would be a(n)

A) excess supply of loanable funds to the market
B) excess demand for loanable funds in the market
C) shortage of loanable funds in the market
D) equilibrium in the market
E) quantity demanded of loanable funds that exceeds the quantity supplied

Question 66

-Exhibit Q-3 shows the market for loanable funds. If the rate of interest is 8 percent, there would be a(n)

A) excess supply of loanable funds to the market
B) excess demand for loanable funds in the market
C) surplus of loanable funds in the market
D) equilibrium in the market
E) quantity supplied of loanable funds that exceeds the quantity demanded

Question 67

-Exhibit Q-3 shows the market for loanable funds. If the rate of interest is 11 percent,there would be a(n)

A) excess supply of loanable funds to the market
B) excess demand for loanable funds in the market
C) shortage of loanable funds in the market
D) equilibrium in the market
E) quantity demanded of loanable funds that exceeds the quantity supplied

Question 68

Which of the following could cause the supply curve of loanable funds to shift to the left?

A) decrease in productivity
B) increase in the rate of interest
C) decrease in the rate of interest
D) increase in productivity
E) expectation that future prices will increase

Question 69

Which of the following could cause the supply curve of loanable funds to shift to the right?

A) increase in productivity
B) increase in the rate of interest
C) decrease in the rate of interest
D) decrease in productivity
E) expectation that future prices will decrease

Question 70

If the supply of loanable funds decreases,

A) more loanable funds will be made available in the loanable funds market
B) the rate of interest will increase
C) the rate of interest will decrease
D) the demand for loanable funds will increase
E) the supply curve will shift to the right

Question 71

If the interest rate is 10 percent, what is the present value of an asset that yields an annual return of $10,000?

A) $1,000
B) $10,000
C) $1,000,000
D) $100,000
E) not enough information to determine

Question 72

The present value of an asset and the rate of interest

A) are not related
B) are related inversely
C) cannot change in opposite directions
D) are equivalent
E) are directly related

Question 73

Suppose you were given a gift of a gold mine that generates $1,000 of net income every year, indefinitely. And suppose the equilibrium rate of interest is 5 percent. What is the present value of that gold mine?

A) $20,000
B) $5,000
C) $50,000
D) $500,000
E) $10,000

Question 74

If Mary invests $500 and receives yearly interest of $40, the rate of interest she is earning on her $500 must be

A) 18 percent
B) 12.5 percent
C) 10 percent
D) 15 percent
E) 8 percent

Question 75

If Sam's $800 earns him a 6 percent rate of interest, each year he receives

A) $480
B) $48
C) $4.80
D) $80
E) $75

Question 76

If the annual returns from an asset increase, the present value of the asset will

A) not be affected
B) decrease
C) increase
D) increase only if there is also an increase in the rate of interest
E) decrease only if there is also an increase in the rate of interest

Question 77

Rent is defined as the

A) payment received for the use of an asset
B) cost to an entrepreneur for using his or her own resources
C) difference between what a resource receives and the cost of bringing that resource into production
D) difference between the total revenue earned from selling a good and the cost of bringing the good into being
E) selling value of land

Question 78

Economist David Ricardo argued that rent

A) is unethical
B) would be higher if the country opened its doors to international trade
C) determines the value of the goods produced with the asset
D) depends on price and not, as commonly thought, price depends on rent
E) can only be earned on land

Question 79

If the city mayor would perform mayoral duties for $10,000 because he just loves the limelight, but the salary for the position is $45,000, then the mayor is earning

A) $10,000 rental income
B) $35,000 professional rent
C) $45,000 differential rent
D) $35,000 wage-related rent
E) $10,000 wage-related rent

Question 80

Mary is a homemaker while husband Jack works at the warehouse. The minimum salary Mary would take for a market-related job is $15,000. She is offered a job at the office next to the warehouse for $25,000, which she takes. Mary receives

A) $10,000 in differential rent
B) $25,000 in wage-related rent
C) $15,000 in wage-related rent
D) $15,000 in differential rent
E) $10,000 in wage-related rent