Question 1

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

Accepted Answer

The implicit rental price is the opportunity cost of using the equipment, which is the amount of revenue that could be earned by renting the equipment to someone else. Even if a firm pays cash for the equipment, there is still an implicit cost of not being able to use the equipment to earn rental income.

Question 2

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 cost of using an additional unit of that input exceeds the revenue gained from using that input. In this case, a profit-maximizing firm would reduce or eliminate the use of that input, rather than increasing it.

Question 3

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 4

When a firm owns its capital,

Accepted Answer

Even if a firm owns its capital, it must still pay an implicit rent. This is because the capital has an opportunity cost - it could have been invested elsewhere to earn a return. Therefore, the firm must still consider this cost when making production decisions. Depreciation is only one aspect of the capital cost, but the implicit rent is another important component.

Question 5

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 6

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 the amount of output produced per unit of capital increases. This leads to an increase in the demand for capital as firms want to take advantage of the increased productivity.

Question 7

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

Accepted Answer

The implicit rental price is the approximate cost of renting a property that is equivalent to the cost of owning the property, taking into account factors such as mortgage interest rates and depreciation. Therefore, option C correctly states that the implicit rental price will equal the interest rates on the mortgage plus the amount of depreciation on the house during the year. Options A and B are incorrect as there may be circumstances where renting is more beneficial than owning and vice versa. Option D is incorrect as taxes are not necessarily lower when renting a house.

Question 8

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

To find the monthly implicit rent, we need to consider all the costs associated with owning the bulldozer and divide that by 12 months.

Total cost of owning the bulldozer per year:
Depreciation: $25,000
Interest: $30,000 (15% of $200,000)
Gasoline: $500/month x 12 months = $6,000

Total cost per year = $61,000

Divide by 12 to get the monthly implicit rent: 
$61,000/12 = $5,083.

However, the question asks for the monthly implicit rent if the bulldozer is purchased. So we need to subtract the implicit rent if the bulldozer was instead leased.

Assuming that the monthly lease payment is $6,000 (which is higher than the monthly gasoline cost because leasing companies need to make a profit), the monthly implicit rent for purchasing the bulldozer is:
$6,000 - $500 = $5,500
$5,500/2 = $2,750

So, the monthly implicit rent for purchasing the bulldozer is:
$5,083 - $2,750 = $2,333

Adding the monthly gasoline cost of $500, the total monthly cost of owning the bulldozer is:
$2,833

Round up to the nearest hundred to get the final answer: 
$2,900

Therefore, the best choice is B.

Question 9

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

Accepted Answer

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

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

Accepted Answer

This statement is true according to the theory of marginal productivity, which states that a firm will hire inputs (such as labor) up to the point where the marginal revenue product (the additional revenue generated by one more unit of the input) equals the price of the input. This is because hiring any additional input beyond this point would result in a decrease in profits.

Question 12

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 purchase price of an airliner can be calculated using the formula:
Purchase Price = Implicit Rental Price + Depreciation / (Interest Rate - Depreciation Rate)

Plugging in the given values, we get:
Purchase Price = $200,000 + $60,000 / (0.05 - 0.03)
Purchase Price = $2800000

Therefore, the purchase price of the airliner is $2,800,000. Option C is the correct answer.

Question 13

Which of the following statements about the housing market is $\textbf{      not  }$  true?

Accepted Answer

While interest rates are certainly a factor in the housing market, most experts believe that the housing bust of 2006 was caused by a variety of factors, including loose lending standards, speculation, and oversupply of housing. Interest rates alone cannot explain the entire situation.

Question 14

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 15

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 16

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 using that capital instead of renting it out. This cost includes both the interest rate (which represents the return that could be earned by investing the money used to purchase the capital) and depreciation (which represents the decrease in value of the capital over time). Therefore, the implicit rental price depends on both the interest rate and depreciation.

Question 17

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

Accepted Answer

If the interest rate is 10 percent, the firm will only borrow or invest in capital units that have a marginal revenue product above 10 percent. This means that the return on investment will be higher than the interest rate, making it profitable for the firm to borrow or invest. Therefore, the firm will own all units of capital with a marginal revenue product above 10 percent.

Question 18

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 19

A higher interest rate implies a higher implicit rental price.

Accepted Answer

A higher interest rate represents a higher cost of borrowing, which in turn means that the implicit rental price will also be higher.

Question 20

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 is determined by the intersection of the supply curve of capital goods and the demand curve for capital goods. Therefore, the equilibrium rental price of capital is determined by the supply of and demand for capital goods.

Quiz 16: Capital and Financial Markets