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Chapter 18 Rent, Interest, and Profit Answer Key
Multiple Choice Questions
1. Economic rent, or pure rent, is
A. a payment made for the use of housing, factory buildings, or capital goods.
2. To say that land rent performs no incentive function means that
D. rent tends to allocate land into the most productive uses.
3. Which of the following statements is correct?
A. Economic profits can properly be regarded as the salaries received by the hired managers of
corporations.
18-2
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
AACSB: Knowledge Application
A c c e s s i b i l i t y : Keyboard Navigation
Blooms: Understand
Difficu lty: 02 Medium
Learning Objective: 18-01 Explain the nature of economic rent and how it is determined.
Test Bank: I
T op i c: Economic Rent
4. Economic rent refers to the price paid for land and other natural resources that
D. are available in nearly unlimited quantities.
5.
Refer to the diagram. Land
A. will cease to be used in production if demand falls below D4.
6.
Refer to the diagram. If demand is D2, a tax of X per acre will
A. encourage the substitution of land for other productive resources.
18-4
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Test Bank: I
T op i c: Economic Rent
Type: Graph
7. Landowners will not receive any rent so long as
A. there is any tax on land.
8. The incentive function of prices
D. only applies to land.
9. The demand for farmland will increase if
A. the demand for food decreases.
18-5
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Difficu lty: 02 Medium
Learning Objective: 18-01 Explain the nature of economic rent and how it is determined.
Test Bank: I
T op i c: Economic Rent
10. For all practical purposes, the supply of land is
D. perfectly elastic.
11. Which of the following is correct?
D. Land rent is a cost to both society and individual producers.
12. The total supply of land is
A. upsloping.
18-6
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
A c c e s s i b i l i t y : Keyboard Navigation
Blooms: Understand
Difficu lty: 02 Medium
Learning Objective: 18-01 Explain the nature of economic rent and how it is determined.
Test Bank: I
T op i c: Economic Rent
13. The rent paid for the pasture land used to graze cattle would increase if
A. the productivity of the land increased.
14.
Refer to the diagrams. Assume that only wheat can be grown on the three grades of land shown
in Figures (a), (b), and (c). Also assume that identical amounts of labor, capital, and other
needed inputs are used in farming each grade of land. On the basis of these three figures, we
A. can say that the land in Figure (a) is most productive.
18-7
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
B. can say that the land in Figure (b) is most productive.
C. can say that the land in Figure (c) is most productive.
D. cannot compare the productivity of the three grades of land.
AACSB: Knowledge Application
Blooms: Understand
Difficu lty: 02 Medium
Learning Objective: 18-01 Explain the nature of economic rent and how it is determined.
Test Bank: I
T op i c: Economic Rent
Type: Graph
15.
Refer to the diagrams. Assume that only wheat can be grown on the three grades of land shown
in Figures (a), (b), and (c). Also assume that identical amounts of labor, capital, and other
needed inputs are used in farming each grade of land. On the basis of these three figures, we
can say that
A. the land shown in both Figures (a) and (b) is a "free good."
18-8
Type: Graph
16.
(1)
(2)
(3)
(4)
(5)
Land
Rent
Quantity
Supplied
Quantity
Demanded
Quantity
Demanded
Quantity
Demanded
$400
60
40
30
10
300
60
50
40
20
200
60
60
50
30
100
60
70
60
40
0
60
80
70
50
Refer to the table, in which the values for columns (2) through (5) are in acres. If the relevant
columns are (1), (2), and (3), land rent will be
A. $100 per acre.
17.
(1)
(2)
(3)
(4)
(5)
Land
Rent
Quantity
Supplied
Quantity
Demanded
Quantity
Demanded
Quantity
Demanded
$400
60
40
30
10
300
60
50
40
20
200
60
60
50
30
100
60
70
60
40
0
60
80
70
50
Refer to the table, in which the values for columns (2) through (5) are in acres. If the relevant
columns are (1), (2), and (4), land rent will be
D. $400 per acre.
18.
(1)
(2)
(3)
(4)
(5)
Land
Rent
Quantity
Supplied
Quantity
Demanded
Quantity
Demanded
Quantity
Demanded
$400
60
40
30
10
300
60
50
40
20
200
60
60
50
30
100
60
70
60
40
0
60
80
70
50
Refer to the table, in which the values for columns (2) through (5) are in acres. If the relevant
columns are (1), (2), and (5), land rent will be
D. $300 per acre.
18-10
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Test Bank: I
T op i c: Economic Rent
Type: Table
19.
(1)
(2)
(3)
(4)
(5)
Land
Rent
Quantity
Supplied
Quantity
Demanded
Quantity
Demanded
Quantity
Demanded
$400
60
40
30
10
300
60
50
40
20
200
60
60
50
30
100
60
70
60
40
0
60
80
70
50
Refer to the table, in which the values for columns (2) through (5) are in acres. Positive land
rent will occur if the relevant columns are
A. (1), (2), and (3) only.
20. The demand for land is
A. perfectly elastic.
18-11
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Blooms: Understand
Difficu lty: 02 Medium
Learning Objective: 18-01 Explain the nature of economic rent and how it is determined.
Test Bank: I
T op i c: Economic Rent
21. The marginal revenue product (MRP) of land declines as more land is brought into use. As
a result, the
D. supply curve for land is upsloping.
22. The marginal revenue product (MRP) of land declines as more land is brought into
production because
A. land is a "free and nonreproducible gift of nature."
23. The economist who advocated a single tax on land was
A. Adam Smith.
24. A unique characteristic of taxes on economic rents is that such taxes
A. stimulate aggregate production.
25. Henry George's single-tax movement was based on the argument that
A. the tax structure should consist solely of a highly progressive tax on nonwage incomes.
26. In his book Progress and Poverty, Henry George argued that
A. poverty is associated with the personal characteristics of individuals and therefore cannot be
remedied by government antipoverty programs.
18-13
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written consent of McGraw-Hill Education.
B. economic rent could be heavily taxed without impairing the supply of land or, therefore, the
productive capacity of the economy.
C. rents should not be taxed, because rental income is the basic source of saving, which
ultimately permits a high level of investment and economic growth.
D. taxes on rents are undesirable because they have a severe disincentive effect on landlords.
AACSB: Knowledge Application
A c c e s s i b i l i t y : Keyboard Navigation
Blooms: Understand
Difficu lty: 02 Medium
Learning Objective: 18-01 Explain the nature of economic rent and how it is determined.
Test Bank: I
T op i c: Economic Rent
27. Henry George advocated a single tax on
A. real capital.
28. Some economists advocate taxes on land because such taxes
D. have a positive incentive function.
18-14
29. Critics of a single tax on land oppose the idea because
A. it would overtax the population.
30. Interest is the
D. reward for consuming rather than saving.
31. Suppose a person pays $80 of annual interest on a loan that has a 5 percent annual interest
rate. The loan amount is
A. $400.
18-15
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Learning Objective: 18-02 Define interest and explain how interest rates vary based on risk,
maturity, loan size, and taxability.
Test Bank: I
T op i c: Interest
32. Suppose that interest payments are $140 per year on a $1,000 loan and $1,188 per year on
an $8,485 loan. The interest rates on the two loans are
A. 14 percent and 20 percent, respectively.
33. Which of the following is correct?
A. Money is a resource, but real capital is not.
34. The equilibrium interest rate equates
A. nominal and real interest rates.
18-16
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
AACSB: Knowledge Application
A c c e s s i b i l i t y : Keyboard Navigation
Blooms: Understand
Difficu lty: 02 Medium
Learning Objective: 18-03 Explain the loanable funds theory of interest rates.
Test Bank: I
T op i c: Loanable Funds Theory of Interest Rates
35. The supply curve of loanable funds is upsloping because
A. businesses find more investments to be profitable at low interest rates than at high interest
rates.
36. The fact that people prefer present consumption to future consumption results in
D. an upsloping demand for loanable funds curve.
37. Which of the following is not a source of loanable funds?
A. the saving of households
18-17
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
C. commercial bank lending
D. government budget deficits
AACSB: Knowledge Application
A c c e s s i b i l i t y : Keyboard Navigation
Blooms: Understand
Difficu lty: 02 Medium
Learning Objective: 18-03 Explain the loanable funds theory of interest rates.
Test Bank: I
T op i c: Loanable Funds Theory of Interest Rates
38. Which of the following is not a component of the demand for loanable funds?
A. household purchases of housing and durable consumer goods
39. The demand for loanable funds is downsloping
D. because the amount of profitable business investment varies directly with the interest rate.
40. Other things equal, an increase in the productivity of capital goods will
A. increase the demand for loanable funds and decrease the equilibrium interest rate.
41. If Congress were to pass a law exempting interest on saving from taxation, the
A. supply of loanable funds would decrease and the equilibrium interest rate would rise.
42. In the market for loanable funds,
A. an increase in available bank lending will increase the interest rate.
43.
Refer to the diagram. If the supply of loanable funds is S1 and the demand for loanable funds is
D1, the equilibrium interest rate and quantity of funds borrowed will be
A. G and A.
44.
Refer to the diagram. If the supply of loanable funds is S0 and the demand for loanable funds is
D0, the equilibrium interest rate and quantity of funds borrowed will be
A. G and A.
