Question 1

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

Accepted Answer

The implicit rental price concept refers to the cost of living in a home whether you own or rent it. Therefore, owning a house could be more beneficial than renting depending on the implicit rental price. The implicit rental price will be determined by the interest rates on the mortgage and the amount of depreciation on the house during the year. Therefore, choice (C) is the correct answer. The other choices are incorrect.

Question 2

A higher interest rate implies a higher implicit rental price.

Accepted Answer

Higher interest rates make borrowing money more expensive, which increases the cost of financing an asset such as real estate. This results in a higher implicit rental price, as the owner of the asset has to charge more to cover their expenses and make a profit.

Question 3

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

Accepted Answer

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

Question 4

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, the implicit rental price is not zero. This is because the firm could have invested that cash elsewhere and earned a return on that investment, which is the opportunity cost of owning the equipment. Therefore, the implicit rental price would be the return the firm could have earned by investing the cash instead of purchasing the equipment.

Question 5

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

Accepted Answer

An improvement in technology increases the return on capital, making it more profitable to invest in the production process. This would lead to an increase in demand for capital as firms would want to capitalise on the increased profitability.

Question 6

When a firm owns its capital,

Accepted Answer

Even if a firm owns its capital, it still incurs an implicit rent cost, which is the opportunity cost of using that capital instead of renting it out to other firms. This cost must be factored into the firm's financial decisions to accurately assess profitability.

Question 7

The implicit rental price of a piece of capital

Accepted Answer

The implicit rental price of a piece of capital depends on both the interest rate and the depreciation. The interest rate is the cost of financing the capital, while the depreciation reflects the decline in value over time. Therefore, the implicit rental price takes into account both the cost of financing and the cost of wear and tear on the capital.

Question 8

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 9

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, like any other price in a market economy, is determined by the interaction of supply and demand. The supply of capital goods is determined by the willingness of owners to rent out their capital goods, while the demand for capital goods is determined by the willingness of firms to pay for them. When the supply and demand curves for capital goods intersect, they determine the equilibrium rental price of capital.

Question 10

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 11

The table below contains information about a firm's marginal revenue product of capital.
a.
The firm should hire 3,000 units or, if fractional units are possible, less than 4,000 but more than 3,000 units.
b.
The firm should hire 4,000 units or, if fractional units are possible, less than 5,000 but more than 4,000 units.
c.
The firm should hire 5,000 units.
d.
The firm should hire 6,000 units or, if fractional units are possible, less than 7,000 but more than 6,000 units.
e.
The firm should hire 7,000 units or, if fractional units are possible, less than 6,000 but more than 7,000 units.

Accepted Answer

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

Question 12

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 of an input is less than the price of the input, then the firm is not getting enough additional revenue from hiring one more unit of that input to justify the cost. In this situation, a profit-maximizing firm would reduce the amount of that input used, not increase it.

Question 13

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 14

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 15

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 as a profit-maximizing firm will always try to maximize its profits by producing at the level where marginal revenue (MR) equals marginal cost (MC) of production. For calculating marginal revenue product (MRP), the marginal revenue generated by each unit of input is multiplied by the marginal product of that input. Therefore, to achieve profit maximization, the firm will select all inputs until the marginal revenue product (MRP) equals the price of the input.

Question 16

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

Accepted Answer

Experts believe that the housing bust of 2006 was not caused by high interest rates since 2000, but rather by a combination of factors including risky mortgage lending practices and a sudden decrease in housing demand.

Question 17

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 expenses for the bulldozer can be broken down as follows:
Gasoline: $500
Interest: ($200,000 x 0.15) / 12 = $2,500
Depreciation: $25,000 / 12 = $2,083.33
Total Monthly Expenses: $5,083.33

To calculate the implicit rent, we need to add the opportunity cost of not investing the $200,000 into something else. Assuming a rate of return of 5%, the implicit rent can be calculated as:
$200,000 x (0.05 / 12) = $833.33

Therefore, the total monthly cost of owning the bulldozer is:
$5,083.33 + $833.33 = $4,916.67

Since this cost is less than the monthly rental cost of $5,000, it would be more cost-effective for the construction firm to purchase the bulldozer.

Question 18

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 as follows:
Purchase price = (implicit rental price + depreciation) / (interest rate - depreciation)

Plugging in the numbers given:

Purchase price = ($200,000 + $60,000) / (0.05 - 0.06)

Purchase price = $260,000 / (-0.01)

Purchase price = $26,000,000 / (-1)

Purchase price = $2,800,000

Therefore, the correct answer is choice C.

Question 19

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 20

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

Accepted Answer

Since the interest rate at which a firm can borrow or lend is 10 percent, the firm will own all units of capital with a marginal revenue product above 10 percent. This is because the firm would only borrow or invest in capital that generates a return greater than or equal to the interest rate. Therefore, any unit of capital with a marginal revenue product below 10 percent would not be profitable for the firm to own.

Quiz 16: Capital and Financial Markets