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b.
assembly-line workers to be lower than that of persons in other professions.
c.
assembly-line workers and that of persons in other professions to be nonetheless equal.
d.
both assembly-line workers and persons in other professions to be unaffected by the
subjective preferences of investors.
57. A student entering college wants to assess the value of investing in human capital. To determine
whether the investment will be profitable, she should compare the
a.
value of her total expected future earnings with the total of her direct and indirect costs of
college.
b.
present discounted value of future earnings with the total of her direct and indirect costs of
her education.
c.
present discounted value of her additional future earnings as the result of the college
education with the present discounted value of only her direct costs of college.
d.
present discounted value of her additional future earnings as the result of the college
education with the present discounted value of her direct and indirect costs of college.
58. Aiden must decide whether or not to go to law school. He knows that he can earn $50,000 per year
with his bachelor's degree, but he expects to earn a minimum of $58,000 per year with the law degree.
An economist would advise him to
a.
take the job that just requires the bachelor's degree.
b.
go to law school, but only if he can finish within 3 years.
c.
go to law school.
d.
consider costs, revenues, and any nonmonetary job considerations he might have also.
59. An investment in human capital will be financially profitable if the present discounted value of the
future earnings generated by the investment exceeds the
a.
present discounted value of both the direct and indirect costs of the investment.
b.
dollar amount of the direct and indirect costs of the investment.
c.
present discounted value of only the direct costs of the investment.
d.
present discounted value of only the indirect costs of the investment.
60. Physical and human capital investments are
a.
different in that the opportunity for economic profit is present for physical capital but not
human capital decisions.
b.
different in that human capital decisions do not involve future income considerations
while physical capital investments do.
c.
similar in that non-pecuniary considerations do not influence the choices of
utility-maximizing decision makers in either case.
d.
similar in that both involve forgoing current income (and consumption) with the objective
of increasing one's future income (and consumption).
61. In a world of perfect knowledge and communication, competitive markets, and no uncertainty,
a.
there would be neither economic profits nor economic losses.
b.
economic profits would exist, but losses would be eliminated.
c.
economic profits and losses would exist to a greater degree than presently is the case.
d.
there would be economic profits; there is not enough information to comment on
economic losses.
62. In a world of imperfect knowledge and uncertainty, the return to investors who undertake projects that
increase the value of resources is called
a.
economic profit.
b.
accounting profit.
c.
the inflationary premium.
d.
the real interest rate.
63. Entrepreneurship is characterized by
a.
the ability to visualize and undertake economically beneficial projects.
b.
originality and innovation.
c.
leadership and discovery.
d.
all of the above.
64. Economic profit that stems from entrepreneurship reflects
a.
market power achieved through the use of public policy that restricts entry into a market.
b.
the ability of some individuals to recognize and undertake economically beneficial
projects that have gone unnoticed by others.
c.
windfall gains due to unanticipated changes in weather.
d.
the influence of special interest groups on the market process.
65. If profit-seeking major oil companies began to use current profits from the oil business to buy
department stores and hotel chains, economic analysis suggests that
a.
oil company profits were high relative to other possible investment opportunities.
b.
oil company executives thought profits from investment outside the oil industry would be
lower than oil-industry investments.
c.
oil company executives must believe these other investments will be more profitable than
investments in the oil industry.
d.
the government would be justified in subsidizing oil companies on grounds of economic
efficiency.
66. Economic profit provides an incentive for persons investing in human and physical capital to
a.
undertake investment projects yielding an uncertain return.
b.
discover and develop beneficial (productive) investment opportunities.
c.
produce products that increase the value of resources.
d.
do all of the above.
67. Which of the following encourages people to engage in activities that yield uncertain returns?
a.
perfect information
b.
economic profit
c.
accounting profit
d.
all of the above
68. Most of the income of Americans comes from
a.
transfer payments.
b.
the ownership of bonds and physical assets.
c.
the ownership of bonds and corporate stocks.
d.
the ownership of human capital.
69. For the past several decades, the percentage of national income in the United States allocated to human
capital (employees and self-employed workers) has been approximately
a.
20 percent.
b.
40 percent.
c.
60 percent.
d.
80 percent.
70. For the past several decades, the percentage of national income in the United States allocated to
physical capital (rents, interest, profit) has been approximately
a.
20 percent.
b.
40 percent.
c.
60 percent.
d.
80 percent.
71. Which one of the following is least likely to influence the investment choices of decision makers?
a.
the pure interest yield
b.
the expectation of profit
c.
the risk associated with the investment
d.
the general level of prices
72. Which of the following is true?
a.
Uncertainty accompanies investment decisions.
b.
At any given time, there are a virtually infinite number of potential investment projects
that might be undertaken by investors.
c.
In order to be successful, entrepreneurs must be good at recognizing and undertaking
economically beneficial projects.
d.
All of the above are correct.
73. If a nation is going to benefit fully from technological advances and entrepreneurial ideas, it must
a.
be relatively easy for persons from diverse backgrounds to try out their ideas at a relatively
low cost.
b.
have a mechanism that will bring unsound projects to a halt.
c.
have a central investment authority that will review projects and decide which should be
undertaken.
d.
be both a and b.
74. In order to fully realize the gains from entrepreneurial innovation,
a.
the government should subsidize potential entrepreneurs.
b.
it must be relatively easy for people to put their ideas in motion.
c.
it must be relatively difficult to continue implementing a bad idea.
d.
both a and b must be true.
e.
both b and c must be true.
75. In a market economy, persons undertaking an investment project must
a.
obtain approval from political authorities before the project can be undertaken.
b.
either personally supply the required funds or convince other investors and financiers to do
so.
c.
finance the project entirely with equity capital.
d.
arrange for bank financing before the project can be undertaken.
76. Which of the following is most important for the growth of income and full realization of an
economy's potential?
a.
a positive rate of time preference that motivates a high rate of current consumption
b.
low real interest rates
c.
the use of central planning to allocate investment funds
d.
a mechanism capable of attracting savings and channeling them into investment projects
that create wealth
77. Economic profit provides both human and physical capital decision makers with an incentive to
a.
exploit workers.
b.
reject investments yielding an uncertain return.
c.
discover and develop beneficial and productive investment opportunities.
d.
do both b and c.
78. Investments that are mistakenly made and generate losses
a.
will occur when future revenues are known with certainty.
b.
indicate that the capital market is incapable of generating wealth.
c.
are normal costs of developing new projects and technologies in a world of uncertainty.
d.
will not occur when capital markets are operating efficiently.
79. When an investment project generates output that is valued more highly than the value of the resources
required for its production,
a.
undertaking the project will create wealth.
b.
it will generally be profitable to undertake the project if property rights are securely
defined and enforced .
c.
entrepreneurs seeking profit will have little incentive to undertake such projects.
d.
both a and b are correct.
80. When investment funds are allocated by government rather than by markets,
a.
profitable investments are more likely to take place.
b.
political influence replaces market return as the basis for allocating funds.
c.
funds will consistently be channeled into wealth-creating projects.
d.
projects that are political boondoggles will be unlikely to be undertaken.
81. The experience of the former Soviet bloc countries illustrates that high rates of investment may fail to
promote rapid economic growth when a country
a.
uses central government planning rather than capital markets to allocate investment funds.
b.
has a strong education system.
c.
has secure property rights.
d.
has a tax system that encourages savings.
82. Which of the following is true?
a.
if an investment project is going to be undertaken, someone must increase his current
consumption.
b.
saving and investment must always be undertaken by different individuals.
c.
if we invest more and use more of our resources to produce capital goods today, fewer
current resources will be available to produce consumption goods.
d.
all of the above are correct.
83. When economists say an individual possesses a "positive rate of time preference," they mean that she
prefers to
a.
save rather than consume.
b.
invest now rather than in the future.
c.
consume goods and services in the future rather than now.
d.
consume goods and services now rather than in the future.
84. If we want to produce more capital goods during the present time period, we must
a.
increase current consumption.
b.
lower future consumption.
c.
reduce current consumption.
d.
reduce our savings rate.
85. Interest is
a.
the price paid for early availability of funds.
b.
the risk of extending a loan.
c.
an unnecessary premium charged for the use of money.
d.
the price one must pay when she does not save.
86. The additional amount a person is willing to pay to obtain a good or resource now rather than later is
called the
a.
interest rate.
b.
nominal price of future goods.
c.
inflationary premium.
d.
risk premium.
87. If the interest rate is 5 percent, what is the current value of $110 to be received one year from now?
a.
$104
b.
$73
c.
$220
d.
$116
88. If an investment project costing $2,800 was expected to yield $1,000 (to be received at year end) for
each of the next three years, a profit-maximizing entrepreneur would
a.
definitely undertake the project.
b.
never undertake the project.
c.
undertake the project if the interest rate was low enough.
d.
undertake the project if the interest rate exceeded 12 percent.
89. What are the major sources of economic profit?
a.
certainty, monopolistic competition, and inelastic supply.
b.
competition, perfect information, and elasticity of market demand.
c.
barriers to entry, uncertainty, and entrepreneurial alertness.
d.
externalities, inflation, and size of firm.
90. What role do non-monetary considerations play in physical capital investment decisions as opposed to
human capital investment decisions?
a.
they play a minor to nonexistent role in both.
b.
they play an equally important role in both.
c.
they are probably more important in physical capital investment decisions.
d.
they are probably more important in human capital investment decisions.
91. Olivia must decide whether or not to go to college. She can either continue to work as a waitress and
earn $22,000 per year or she can go to school and expect to earn $32,000 per year when she finishes.
She should
a.
continue to work as a waitress.
b.
go to school, but only if she knows she can finish in four years.
c.
go to school no matter what.
d.
we cannot tell since there may be important nonmonetary considerations that Olivia will
take into account.
92. Most of the income of Americans comes from
a.
transfer payments.
b.
individuals selling their labor services.
c.
the ownership of bonds and corporate stocks.
d.
the ownership of small businesses.
93. In an uncertain world, private investors
a.
always make decisions that lead to economic profit.
b.
never make decisions that generate economic losses.
c.
sometimes make decisions that lead to economic losses.
d.
rarely invest in human capital.
94. Data shows that countries that invest more and channel more of those investments into productive
projects will generally have
a.
higher rates of current consumption.
b.
higher future incomes.
c.
lower rates of economic growth.
d.
lower real interest rates.
95. The net present value of $1,000 received one year from now will
a.
increase with the interest rate.
b.
exceed $1,000 as long as the interest rate is positive.
c.
exceed the net present value of $1,000 to be received two years from now.
d.
equal $1,100 if the current interest (discount) rate is 10 percent.
96. If the money rate of interest is 15 percent and the real rate of interest is 5 percent, the inflationary
premium is
a.
zero.
b.
5 percent.
c.
10 percent.
d.
15 percent.
ESSAY
97. If people prefer to consume goods now rather than in the future, how does anyone save money?
98. Professor Smith completed a study that showed that 60 percent of all the students who graduated from
her college purchased new cars. What might explain this?
99. In a barter economy that had no form of currency, how could interest exist?
100. Erin just won Lotto America, which will pay her $40 million over the next 20 years at a rate of $2
million a year. Is Erin $40 million richer today?
101. The Shackled Foot Corporation is a conglomerate with four major divisions. Each division has
performed poorly over the years and none has a return greater than 2 percent. Karen, who could have
invested her money at 5 percent, buys the company. What does her action imply?
102. Arnold is considering purchasing a business for $100,000. It will pay him an annual return of $8,000.
If the interest rate is 10 percent, should he buy the business? What if the interest rate was 6 percent?
103. The Jones family has always been in the business of manufacturing and selling automobile tires.
Usually the profit they earn is reinvested in the business. This year Seth, the youngest son, wants to
invest the profit into starting a candy company. If Seth is a shrewd businessman, what does his
suggestion indicate?
