Question 1

A profit-maximizing firm will select all inputs so that the marginal revenue product is equal to the price of the input.

Accepted Answer

This is known as the rule for profit-maximizing input usage, which states that a firm will hire each input until the point at which the marginal revenue product equals the price of the input. This ensures that the firm is using each input in the most efficient and profitable way.

Question 2

Draw a diagram of a market in which economic rent occurs. Be sure to label the rent in the diagram.

Accepted Answer

The answer of Draw a diagram of a market in...

Question 3

Firms use physical capital markets to raise funds for expansion.

Accepted Answer

Firms use financial capital markets to raise funds for expansion, not physical capital markets. Physical capital refers to tangible assets used in production, whereas financial capital markets involve the buying and selling of financial securities for funding.

Question 4

Explain how a firm decides how much capital to hire or purchase.

Accepted Answer

The answer of Explain how a firm decides how much...

Question 5

The implicit rental price of a piece of capital

Accepted Answer

The implicit rental price of a piece of capital is the opportunity cost of employing that capital, which incorporates both the foregone return on alternative investments (the interest rate) and the depreciation cost. Therefore, the implicit rental price depends on both the interest rate and depreciation.

Question 6

Which of the following statements about the housing market is not true?

Accepted Answer

While interest rates may have played a role in the housing bust of 2006, many experts believe that they were actually too low, leading to excessive borrowing and speculation in the housing market.

Question 7

Because capital is a fixed input, the marginal revenue product of capital remains fixed as capital changes.

Accepted Answer

Capital is not inherently a fixed input; it can vary in the short or long term. The marginal revenue product of capital can change as the amount of capital changes, reflecting its productivity and contribution to total revenue.

Question 8

If the marginal revenue product is less than the price of an input, then a profit-maximizing firm will increase the amount of the input.

Accepted Answer

If the marginal revenue product is less than the price of an input, then the firm is losing money by using that input. Therefore, the profit-maximizing strategy would be to decrease the amount of the input used or to find a cheaper input that provides the same level of output.

Question 9

If the interest rate at which a firm can borrow or lend is 10 percent, then the firm will own

Accepted Answer

The firm will borrow or lend at a 10 percent interest rate, which means that any capital investment that provides a marginal revenue product higher than 10 percent will generate a positive return for the firm. Therefore, the firm will own all units of capital with a marginal revenue product above 10 percent.

Question 10

A tax on renting capital equipment will always decrease the quantity of capital supplied.

Accepted Answer

A tax on renting capital equipment might not always decrease the quantity of capital supplied because the impact depends on the elasticity of supply and demand. If the supply is perfectly inelastic, or if the demand is perfectly elastic, the quantity supplied might not change. Additionally, suppliers might absorb the cost of the tax or find ways to pass it on to renters without reducing the quantity supplied.

Question 11

A construction firm can buy a bulldozer for $200,000. Gasoline costs $500 per month, the interest rate is 15 percent, and depreciation is $25,000 per year. If the bulldozer is purchased, the monthly implicit rent will be

Accepted Answer

The monthly implicit rent includes the costs of owning and operating the bulldozer. So, we need to calculate the total monthly cost of owning and operating it and then subtract the operating costs from it to find the implicit rent.

Total monthly cost = (Interest + Depreciation) / 12 + Gasoline cost
= (0.15 * $200,000 + $25,000) / 12 + $500
= $3,583.33 + $500
= $4,083.33

Implicit rent = Total monthly cost - Operating costs
= $4,083.33 - $500
= $3,583.33
Therefore, the monthly implicit rent is $4,583.

Hence, the best choice is B.

Question 12

Applied to the housing market, the implicit rental price concept states that

Accepted Answer

The implicit rental price concept states that the implicit rental price of owning a house is equal to the opportunity cost of owning the house. This includes the interest rates on the mortgage and the amount of depreciation on the house during the year. Therefore, option C is the correct statement. Option A and B are not correct as the decision to rent or own a house depends on individual factors. Option D is incorrect as taxes may be higher or lower depending on the status of ownership.

Question 13

When a firm owns its capital,

Accepted Answer

Even when a firm owns its capital, it still incurs an implicit opportunity cost in the form of forgone rent that could be earned if the capital were leased or rented out to another firm. Therefore, it still pays an implicit rent even if there is no explicit rental payment.

Question 14

If the implicit rental price of an airliner is $200,000 per year, the interest rate is 5 percent, and depreciation is $60,000 per year, then the purchase price of the airliner is

Accepted Answer

The formula for implicit rental price is:

Implicit Rental Price = (Interest rate x Purchase price) + Depreciation

Rearranging the formula, we get:

Purchase price = (Implicit Rental Price - Depreciation) / Interest rate

Substituting the given values, we have:

Purchase price = ($200,000 - $60,000) / 0.05 = $2,800,000

Therefore, the purchase price of the airliner is $2,800,000.

Question 15

Why do economists say that firms that own capital pay rent?

Accepted Answer

The answer of Why do economists say that firms that...

Question 16

Which of the following situations would increase the demand for capital?

Accepted Answer

An improvement in technology increases the marginal product of capital, meaning that each unit of capital can produce more output than before. This, in turn, increases the demand for capital as firms seek to take advantage of the higher returns on investment.

Question 17

The table below contains information about a firm's marginal revenue product of capital.  Suppose the rental price of capital is $425,000. How many units should the firm hire to maximize profit?

Accepted Answer

The answer of The table below contains information about a...

Question 18

A higher interest rate implies a higher implicit rental price.

Accepted Answer

A higher interest rate means that the cost of borrowing money is higher, which increases the implicit rental price of the asset being financed.

Question 19

The equilibrium rental price of capital is determined by the supply of and demand for capital goods.

Accepted Answer

The equilibrium rental price of capital depends on the intersection of the supply and demand curves for capital goods, which determines the price and quantity at which the market clears.

Question 20

When a firm pays cash for a piece of equipment, the implicit rental price is zero.

Accepted Answer

When a firm pays cash for a piece of equipment, it still incurs implicit costs such as the cost of capital and the opportunity cost of not investing that money elsewhere. Therefore, the implicit rental price is not zero.

Quiz 16: Capital and Financial Markets