Question 1

The spread between price and marginal cost of an exhaustible resource must grow by the rate of interest so that

Accepted Answer

The spread between price and marginal cost of an exhaustible resource must grow by the rate of interest so that resource owners are willing to sell some of the resource in the future. This is because the higher price in the future will compensate for the interest cost of holding onto the resource. Therefore, the spread between price and marginal cost must increase by the rate of interest to incentivize resource owners to sell some of the resource in the future.

Question 2

Suppose an exhaustible resource can be sold only this period or next period.The resource owner is considering selling 100 tons of the resource this period.The future value of the resource when 100 tons are sold this period is less than the present value of the 100 tons sold this period multiplied by one plus the interest rate.What should the resource owner do?

Accepted Answer

The answer of Suppose an exhaustible resource can be sold...

Question 3

An exhaustible resource with a very large known reserve will most likely exhibit

Accepted Answer

An exhaustible resource with a very large known reserve will most likely exhibit a constant price in the near future. This is because the known reserve allows for predictable supply, and the exhaustible nature of the resource means that demand will not increase indefinitely. Therefore, barring any significant changes in technology or policy, the price will likely remain relatively constant.

Question 4

Explain why a firm may rationally make an investment when its cash flow from the investment is not positive each year.

Accepted Answer

The answer of Explain why a firm may rationally make...

Question 5

Suppose that your college offers you two payment plans.You may either pay tuition of $10,000 per year at the beginning of each of the next four years,or pay just $38,000 before the start of freshman year.If the interest rate is 10%,what would you do? If the interest rate were 2%,what would you do? Intuitively explain the difference in your answer.

Accepted Answer

The answer of Suppose that your college offers you two...

Question 6

A financial services company offers to pay you $1,000 a year for life in exchange for $20,000 today.What factors affect your decision to take this offer?

Accepted Answer

The answer of A financial services company offers to pay...

Question 7

An investment is profitable as long as its internal rate of return is equal to the rate of interest.

Accepted Answer

Such an investment has a profit of zero.The investment is profitable if the internal rate of return exceeds the interest rate.

Question 8

What is the internal rate of return on a new $2,000 heater that would reduce your heating costs by $200 a year forever? Under what conditions would you make the purchase?

Accepted Answer

The answer of What is the internal rate of return...

Question 9

A recent purchaser of a bond that agrees to pay an annual nominal amount would hope that interest rates do not rise.

Accepted Answer

for two reasons.First,the person is locked into a lower interest rate.Second,if the person needs to sell the bond,he will incur a loss since at higher interest rates,bond prices fall.

Question 10

You grow poplar trees.The lumber yard purchases cut trees from you.The trees grow 1 foot per year.Assuming a constant real price per foot for poplar and a real interest rate of 3%,would you sell a 20-foot tree today?

Accepted Answer

The answer of You grow poplar trees.The lumber yard purchases...

Question 11

In reality,prices of non-renewable resources have not increased continually according to the model developed in Section 16.3 because of

Accepted Answer

The prices of non-renewable resources like oil and gas depend on various factors. While scarcity and demand for the resource play a role in determining its price, other factors such as technological advancements, changes in market power of producers, and government policies can also have an impact. For example, the development of fracking technology has significantly changed the marginal cost of producing shale gas, which has led to a decline in its price. Similarly, changes in market power due to mergers and acquisitions or fluctuations in supply and demand can also affect prices. Therefore, all of the above factors can contribute to the fluctuation of non-renewable resource prices, making option D the correct answer.

Question 12

The growth over time in the spread between price and marginal cost of an exhaustible resource is equal to

Accepted Answer

The growth over time in the spread between price and marginal cost of an exhaustible resource is equal to the interest rate, according to the Hotelling Rule. This principle states that the net price (price minus marginal cost) of a non-renewable resource will increase at the rate of interest over time, reflecting the opportunity cost of depleting the resource now rather than later.

Question 13

Bobby faces two choices.The first is to receive $600 on the spot.The other choice is to receive $800 a year from now.The interest rate is 5% per year.What could a possible explanation for Bobby choosing to receive $600 on the spot?

Accepted Answer

Bobby may have time-inconsistent preferences, meaning that he values immediate gratification over delayed gratification. Therefore, he may prefer the immediate payment of $600 over waiting a year for $800.

Question 14

Assel grows mulberry trees.The lumber yard purchases cut trees from you.The trees grow 1 foot per year.Assuming a constant real price per foot for mulberry,at what interest rate would Assel be willing to sell a 10-foot tree today?

Accepted Answer

The answer of Assel grows mulberry trees.The lumber yard purchases...

Question 15

A firm has two projects.Project A has an internal rate of return of 6%.Project B's internal rate of return is 11%.If the firm's discount rate is 9.57%,

Accepted Answer

Using the discount rate of 9.57%, project A's net present value is negative (less than zero) and project B's net present value is positive. Therefore, only project B has a positive net present value.

Question 16

Suppose that your college offers you two payment plans for your last two years of college.You may either pay tuition of $20,000 per year at the beginning of each of the next two years,or pay just $38,000 before the start of freshman year.What would the interest rate have to be for you to be indifferent between these two deals? Explain.

Accepted Answer

The answer of Suppose that your college offers you two...

Question 17

Technological improvements in coal mining will

Accepted Answer

Technological improvements in coal mining usually lead to increased efficiency and productivity, which in turn leads to a decrease in the cost of producing coal. This tends to lower the price of coal in the market, making it more affordable for consumers.

Question 18

If an exhaustible resource is priced at marginal cost that remains constant over time,then

Accepted Answer

The answer of If an exhaustible resource is priced at...

Question 19

If an exhaustible resource is scarce,has constant marginal cost over time,and is sold in a competitive market,then

Accepted Answer

Since the exhaustible resource is scarce and has constant marginal cost over time, the supply of the resource will decrease over time, which leads to an increase in price due to its scarcity. In a competitive market, the price will be determined by the intersection of supply and demand, and as supply decreases, the price will increase.

Question 20

If a non-renewable resource is scarce,has constant marginal cost of production and is sold in a competitive market,

Accepted Answer

The answer of If a non-renewable resource is scarce,has constant...

Quiz 16: Interest Rates, Investments, and Capital Markets