Question 1

If the interest rate on the loanable funds market is above its equilibrium level,

Accepted Answer

When the interest rate is above the equilibrium level, it means that the price of borrowing is higher than what many borrowers are willing to pay, leading to fewer loans being taken out. At the same time, higher interest rates make saving more attractive, so more people are willing to lend out their money. This combination results in an excess supply of loanable funds, as the quantity supplied exceeds the quantity demanded.

Question 2

Karl Marx's view of income derived from interest is that it is

Accepted Answer

Karl Marx viewed income derived from interest as objectionable because he believed that property ownership, including the ownership of capital, is unjustifiable. Marx argued that the capitalist system, which allows for income through interest, exploits workers and concentrates wealth and power in the hands of a few.

Question 3

Assuming a 5 percent rate of interest, the present value of a business that generates an annual income of $20,000 is worth

Accepted Answer

The present value of a business generating a constant annual income can be calculated using the formula for the present value of a perpetuity: PV = C / r, where C is the annual income and r is the interest rate. Here, C = $20,000 and r = 5% or 0.05, so PV = $20,000 / 0.05 = $400,000.

Question 4

Eliminating all farm price floors would

Accepted Answer

Eliminating price floors would likely lead to lower market prices for farm goods because price floors are minimum prices set by the government above the equilibrium price, ensuring farmers can sell their products at a higher price than the market would naturally allow. Removing these would likely result in prices dropping to the equilibrium level, which could be lower than the price floor, leading to decreased revenue for farmers. This decrease in revenue could, in turn, lower the value of farm property as the profitability of farming decreases.

Question 5

A cereal producer finds that when Eli Manning, the quarterback for the New York Giants, endorses its product, its annual income increases from $1 million to $3 million. If the interest rate is 10 percent, the present value of Eli's name is

Accepted Answer

The answer of A cereal producer finds that when Eli...

Question 6

The difference between what a productive resource receives as payment for its use in production and the cost of bringing that resource into production is defined as

Accepted Answer

Rent, in economic terms, refers to the payment to a factor of production (like land, labor, or capital) over and above what it would cost to bring that factor into production. This concept is distinct from the everyday use of "rent" and is more about the economic surplus or earnings beyond the basic cost of bringing a resource into use.

Question 7

If the price of land is zero,

Accepted Answer

If the price of land is zero, it means that land is available without cost, making it a free good, and thus rent would also be zero.

Question 8

If a country's population increases while the supply of farmland is fixed, then farmland prices will most likely

Accepted Answer

The marginal revenue product of land increases as the population grows, leading to higher demand for food produced on that land, which in turn raises farmland prices.

Question 9

If, in response to a growing demand for food, farmers create productive acreage by draining swamps,

Accepted Answer

Draining swamps to create productive acreage introduces variability in the productivity of land, leading to differential rents. This is because some lands will be inherently more productive than others due to their location, fertility, or other factors, resulting in different levels of rent.

Question 10

If there are cost differences in transporting goods produced on different acres of land to the same market,

Accepted Answer

Location rents emerge due to the differences in transportation costs for goods produced on different acres of land to the same market. This concept is part of the economic theory of rent, which suggests that land closer to the market, with lower transportation costs, will have a higher rent value.

Question 11

If the supply price of land is zero, including costs of transporting goods produced on the land to the market, then

Accepted Answer

If the supply price of land is zero, including transportation costs, it implies that the land has no cost associated with its use or access to markets, leading to no basis for charging rent. Rent is typically charged based on the value or cost associated with land, so if these are zero, there would be no rent-yielding acres.

Question 12

The difference between the market price of an acre of land and its supply price (including transportation) is

Accepted Answer

Land rent is the difference between the market price of an acre of land and its supply price, including transportation costs. This difference represents the income earned from owning the land.

Question 13

Suppose acre A is located at the market with zero transport costs of bringing its radishes to market. It costs acre B, located 20 miles away, $500 to transport its radishes to market. If demand for radishes is large enough so that both acres will be used to produce radishes,

Accepted Answer

The owner of acre A will earn a location rent of $500 because they do not have to incur the $500 transportation cost that the owner of acre B does. This advantage translates into a location rent for acre A, as they can sell their radishes at the same market price as acre B but without the additional cost, effectively earning them an additional $500.

Question 14

When the supply of land is upward sloping,

Accepted Answer

Different supply prices for different lands are generated when the supply of land is upward sloping because it implies that more land will be supplied only at higher prices, reflecting the varying opportunity costs of bringing additional land into use.

Question 15

A decrease in population can be expected to

Accepted Answer

A decrease in population typically leads to a decrease in the demand for land, as fewer people means less need for housing, commercial spaces, and resources that require land.

Question 16

If the supply price on 100 acres is zero, then $30 for the next 100 acres, and finally $60 for the third 100 acres, the supply curve of land curve is

Accepted Answer

The supply curve described is upward-sloping and step-shaped because the price increases in steps as more acres are supplied: it starts at zero for the first 100 acres, then increases to $30 for the next 100 acres, and finally to $60 for the third 100 acres. This creates a step-shaped curve rather than a smooth, continuous slope.

Question 17

When the supply curve of land is upward sloping and intersects the demand curve at $30 per acre, then the last acre brought into production receives

Accepted Answer

The last acre brought into production receives $0 in land rent because it is at the equilibrium point where the supply and demand curves intersect, meaning the price paid equals the opportunity cost.

Question 18

If a new shopping mall is built on the outskirts of a town, we can expect

Accepted Answer

Lands near the new mall are likely to receive location rent due to increased demand and development potential associated with the proximity to the new shopping mall. This is based on the principle that areas near significant commercial developments often become more desirable for both commercial and residential purposes, leading to an increase in their value and the rent that can be charged.

Question 19

Assume that the interest rate on the loanable funds market is 10 percent. If recording artist M.I.A. enjoys performing so much that she would do it for free, yet earns $10million a year, her annual wage-related rent is

Accepted Answer

Wage-related rent refers to the difference between what an individual is willing to accept for their work and what they actually earn. Since M.I.A. would perform for free but earns $10 million, her entire earnings of $10 million are considered wage-related rent.

Question 20

If a college president earns $120,000 a year, but would have taken the job for $100,000 a year, the president's wage-related rent is

Accepted Answer

The president's wage-related rent is the difference between what they actually earn ($120,000) and what they would have taken the job for ($100,000), which is $20,000.

Quiz 17: Interest, Rent, and Profit