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Chapter 13: Capital, Interest, Entrepreneurship, and Corporate Finance
True / False
1. If a person produces capital goods, she sacrifices the current production of consumer goods in order to obtain the
capability of producing more goods and services in the future.
a.
True
b.
False
True
2. The decision to invest in capital is taken on the basis of a comparison between the current cost of investment and the
future benefit from it.
a.
True
b.
False
True
3. Impatience and uncertainty are explanations for a positive rate of time preference.
a.
True
b.
False
False
4. Interest is paid because future consumption is more highly valued than present consumption.
a.
True
b.
False
False
5. The expected rate of return on capital is found by dividing the expected resource cost per year by the marginal revenue
product.
a.
True
b.
False
False
6. A profit-maximizing firm invests up to the point at which the expected rate of return on capital is the greatest.
a.
True
b.
False
False
7. In order to predict the expected rate of return on investment, producers must forecast the interest rate.
a.
True
b.
False
False
8. An increase in the interest rate tends to increase the demand for loanable funds.
a.
True
b.
False
False
9. If consumers elect to postpone consumption to have a more enjoyable future, the supply of loanable funds would
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Chapter 13: Capital, Interest, Entrepreneurship, and Corporate Finance
increase and the market rate of interest would fall.
a.
True
b.
False
True
10. The more valuable a collateral backing up a loan, other things constant, the higher the interest rate charged on the
loan.
a.
True
b.
False
False
11. The interest rate charged on a risk-free loan exceeds the rate on a risky loan.
a.
True
b.
False
False
12. Interest rates on credit card balances are usually very low as credit cards are held by people with good credit ratings.
a.
True
b.
False
False
13. Generally, the longer the duration of a loan, the lower the interest rate, other things constant.
a.
True
b.
False
False
14. There is a negative relationship between the administration costs of a loan and the interest rate charged.
a.
True
b.
False
False
15. Administration costs make small loans less profitable for banks than large ones, other things equal.
a.
True
b.
False
True
16. The interest earned on loans to local and state governments is taxed by the federal government.
a.
True
b.
False
False
17. The present value of a promise to pay $100 one year from now is approximately $90.91 if the interest rate is 10
percent.
a.
True
b.
False
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Chapter 13: Capital, Interest, Entrepreneurship, and Corporate Finance
True
18. The present value of a promise to pay $100 one year from now would be greater if the interest rate were higher.
a.
True
b.
False
False
19. There is an inverse relationship between the present value of a future amount and the interest rate used for
discounting.
a.
True
b.
False
True
20. A perpetuity is an annuity with a fixed term.
a.
True
b.
False
False
21. The present value of an annuity that pays $100 each year indefinitely is $2,000 if the interest rate is 5 percent.
a.
True
b.
False
True
22. Entrepreneurs create new products and new production methods, which are sources of technological progress.
a.
True
b.
False
True
23. If an entrepreneur does not manage a company established by him, he is no longer considered to be an entrepreneur.
a.
True
b.
False
False
24. The stockholders of a corporation take on the risk of the corporation’s success or failure and are, therefore, considered
entrepreneurs.
a.
True
b.
False
False
25. The retained earnings of a firm are a source of corporate finance.
a.
True
b.
False
26. Stockholders accept personal liability for the debts of a company as they are the owners of the company.
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Chapter 13: Capital, Interest, Entrepreneurship, and Corporate Finance
a.
True
b.
False
False
27. When a start-up company becomes successful and the entrepreneur needs to achieve economies of scale, it will not
make economic sense to consider an initial public offering (IPO).
a.
True
b.
False
False
28. The payment stream from shares is more predictable than the payment stream from bonds.
a.
True
b.
False
False
29. Securities exchanges pay no attention to hedge funds.
a.
True
b.
False
False
30. If 900 million shares of stock are traded on the New York Stock Exchange today at an average price of $100, then the
total amount of money that can be raised by a corporation whose stock is traded on this exchange will be $90 billion.
a.
True
b.
False
False
31. The value of a corporation remains stable in the securities exchange if it is a large company.
a.
True
b.
False
False
32. Companies in financial trouble can raise funds easily from the securities market.
a.
True
b.
False
False
Multiple Choice
33. Saving is _____.
a.
helpful for production but not necessary
b.
not useful for production because it decreases consumption
c.
required for production
d.
not useful for production because it is not a resource
e.
not useful for production because savers must be paid interest
c
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34. Production cannot occur without _____.
a.
saving
b.
government intervention
c.
a market system
d.
low interest rates
e.
high interest rates
a
35. Identify the correct statement.
a.
Savings reduces the current production of only capital goods.
b.
Savings reduces the current production of only consumer goods.
c.
Savings is necessary for production because production takes time.
d.
Savings is necessary for production because production is expensive.
e.
Savings is not necessary for production because the opportunity cost of production is zero.
c
36. The opportunity cost of producing capital goods is a(n):
a.
decrease in the current production of consumption goods.
b.
increase in the future production of consumption goods.
c.
increase in the rate of interest.
d.
increase in the stock of capital available for future use.
e.
decrease in the amount of capital available for future use.
a
37. The benefit of the production of capital goods is a(n):
a.
increase in the current production of consumption goods.
b.
increase in the future production of all goods.
c.
increase in the market interest rate.
d.
decrease in the market interest rate.
e.
increase in the expected rate of return on capital.
38. The difference between income and consumption is known as _____.
a.
rent
b.
profit
c.
saving
d.
opportunity cost
e.
investment
c
39. Increased saving today means _____.
a.
more consumption today and in the future
b.
less consumption today and in the future
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Chapter 13: Capital, Interest, Entrepreneurship, and Corporate Finance
c.
more consumption today and less in the future
d.
less consumption today and more in the future
e.
more income today and more consumption in the future
40. For a typical consumer, present consumption is _____.
a.
preferred to future consumption
b.
less rewarding than future consumption
c.
preferred to future saving
d.
not preferred to future saving
e.
financed out of present saving
41. A positive rate of time preference means that:
a.
as time progresses, people value consumption more than saving.
b.
consumption in the future is more important than current consumption.
c.
current consumption is valued less than consumption in the future.
d.
consumption in the future is valued less than current consumption.
e.
consumption in the future and consumption today are positively related.
42. The rate of time preference is positive:
a.
only when interest rates are positive.
b.
only when interest rates are negative.
c.
only when people save.
d.
when people prefer to save now rather than consume.
e.
when people prefer to consume now rather than later.
43. Most companies that sell CDs by mail deliver in 1 to 2 weeks. Mosey Music Inc. takes 4 weeks to deliver CDs. Which
of the following is likely to be true in this case?
a.
Mosey Music will lose all its customers.
b.
Mosey Music will not lose customers because the good in question is CDs, which has substitutes.
c.
Mosey Music will have to charge more for its CDs to make up for the business it loses through slow delivery.
d.
Mosey Music will have to charge less for its CDs to compete with firms that deliver CDs faster.
e.
Mosey Music will be able to charge the same amount for its CDs as other firms do as long as the quality of the
CDs is the same.
44. Which of the following does not reflect a positive rate of time preference?
a.
People being willing to pay high prices to see new movies at theaters
b.
A bank paying interest on savings accounts
c.
Ed saving money for a rainy day
d.
Dry cleaners that provide faster service charging more for their service
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Chapter 13: Capital, Interest, Entrepreneurship, and Corporate Finance
e.
Dan buying the Harry Potter books as soon as they are published
c
45. Sally loves to see a movie as soon as it is released in theaters. This is an example of:
a.
a positive rate of time preference.
b.
utility maximization.
c.
diminishing marginal utility.
d.
relative preference.
e.
Pareto optimality.
a
46. If Arnold has a positive rate of time preference, he prefers to _____.
a.
save now to protect himself from inflation
b.
consume now rather than save
c.
invest in stocks and bonds
d.
invest in education
e.
invest in education
47. Interest is a payment for deferred _____.
a.
taxation
b.
saving
c.
consumption
d.
investment
e.
annuity
c
48. The interest rate compensates _____.
a.
bankers for their time spent on paperwork
b.
borrowers for their increased consumption today
c.
savers for forgoing consumption in the current period
d.
consumers for increasing current consumption
e.
savers for deferring investment in the current period
c
49. Which of the following would be true if the market interest rate increases?
a.
The cost of borrowing would increase, and this would decrease saving.
b.
The opportunity cost of consuming a good in the future would increase, and this would increase saving.
c.
The opportunity cost of consuming a good in the future would increase, and saving would decrease.
d.
The reward for saving would decrease, and present consumption would increase.
e.
The reward for saving would increase, and this would increase saving.
e
50. If the annual interest rate is 5 percent, _____.
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Chapter 13: Capital, Interest, Entrepreneurship, and Corporate Finance
a.
$100 saved today will be worth $105 after one year
b.
$90 saved today will be worth $100 after one year
c.
$100 saved today will be worth $150 after one year
d.
$99 saved today will be worth $100 after one year
e.
$100 saved today will be worth $1,000 after one year
51. If the annual interest rate is 4 percent, a consumer who spends $100 today:
a.
will have to return$104 to a bank.
b.
will have to pay $104 next year to get the same set of goods.
c.
will receive $96 from a bank next year.
d.
will have to pay $96 next year to get the same set of goods.
e.
is giving up the ability to spend $104 on goods next year.
52. If the interest rate increases from 6 percent to 10 percent per year, every $100 saved will earn:
a.
$4 more per year than before.
b.
$6 more per year than before.
c.
$10 more per year than before.
d.
$16 more per year than before.
e.
$60 more per year than before.
53. Which of the following is true of the market interest rate?
a.
It typically increases from one year to the next.
b.
It represents the demand for investment.
c.
It represents the opportunity cost of funds.
d.
It represents the supply of loanable funds.
e.
It is not affected by the demand for investment.
54. The Whitmans decided to offer their beach house in Miami for rent. If they expect a monthly rent of $5,000 and the
cost of building the house is $1 million, their expected rate of return is:
a.
0.005 percent annually.
b.
0.5 percent annually.
c.
5 percent annually.
d.
15 percent annually.
e.
10 percent annually.
55. If a firm can borrow or lend at a 10 percent annual interest rate, it will _____.
a.
buy all units of capital with an expected rate of return above 10 percent
b.
buy all units of capital with an average rate of return above 10 percent
c.
buy all units of capital with an expected rate of return below 10 percent
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Chapter 13: Capital, Interest, Entrepreneurship, and Corporate Finance
d.
buy all units of capital with an average rate of return below 10 percent
e.
select only the unit of capital with the highest expected rate of return, assuming it is above 10 percent
a
56. A firm’s demand curve for investment is its:
a.
expected annual earnings curve.
b.
marginal product curve.
c.
marginal revenue curve.
d.
expected rate of return on investment curve.
e.
supply of loanable funds curve.
57. The figure given below shows the expected rate of return on investment undertaken by a firm. If the interest rate is 5
percent, investment will equal approximately _____.
Figure 13.1
a.
$1,500,000
b.
$700,000
c.
$1,000,000
d.
$950,000
e.
$1,250,000
e
58. The figure given below shows the expected rate of return on investment undertaken by a firm. At an interest rate of 8
percent, investment will equal approximately _____.
Figure 13.1
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Chapter 13: Capital, Interest, Entrepreneurship, and Corporate Finance
a.
$1,500,000
b.
$500,000
c.
$1,000,000
d.
$950,000
e.
$1,250,000
59. A firm’s expected rate of return on investment curve shows the amount:
a.
saved by the firm at each interest rate.
b.
invested by the firm at each interest rate.
c.
saved by the firm at each alternative rate of time preference.
d.
invested by the firm at each alternative marginal resource cost.
e.
saved by the firm at each alternative marginal revenue product of investment.
60. If the expected rate of return from a purchase of equipment is greater than the market interest rate, the firm should
_____.
a.
not purchase the equipment
b.
purchase the equipment
c.
seek government assistance in decreasing the market interest rate
d.
inform stockholders that the firm expects a decrease in earnings from the purchase
e.
seek government assistance in increasing the market interest rate
61. When the expected rate of return from a purchase of equipment is less than the market interest rate, a firm should
_____.
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Chapter 13: Capital, Interest, Entrepreneurship, and Corporate Finance
a.
seek government assistance in decreasing the market interest rate
b.
inform stockholders that the firm can expect increased earnings from the purchase
c.
use the equipment less intensively in production to reduce its depreciation cost
d.
purchase the equipment
e.
not purchase the equipment
62. Intellectual property is _____.
a.
a special form of capital
b.
a type of labor
c.
a special type of service
d.
cheap to produce, but expensive to transmit
e.
a kind of entrepreneurial ability
63. Intellectual property:
a.
requires copyright protection that is expensive to obtain but cheap to enforce.
b.
usually ends up being owned by the government.
c.
is costly to create but can be reproduced at low cost.
d.
cannot be owned by anyone.
e.
is a tangible asset owned by digital companies.
64. The Internet has created some special problems for intellectual property. One problem is that:
a.
the price of intellectual property exceeds marginal cost.
b.
the cyber market has not yet reached equilibrium.
c.
intellectual property can be downloaded, modified, and then resold.
d.
the marginal cost of enforcing property rights exceeds the marginal benefit.
e.
the price of intellectual property usually exceeds the marginal benefit.
65. One problem associated with intellectual property is that _____.
a.
only one person can use it at a time
b.
the patent system reduces incentives to create new intellectual property
c.
the cost of producing it usually exceeds the benefit from it
d.
encryption software creates monopoly power
e.
the original owner has difficulty preventing non-paying beneficiaries from using the property
66. The patent and copyright systems:
a.
reduce the cost of duplicating intellectual property.
b.
help make the market for intellectual property more competitive.
c.
are forms of intellectual property.
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Chapter 13: Capital, Interest, Entrepreneurship, and Corporate Finance
d.
help increase the incentives to create new intellectual property.
e.
help easily transfer intellectual property rights from the creator to the user.
67. The demand curve for loanable funds is _____.
a.
a straight line through the origin
b.
horizontal
c.
vertical
d.
downward sloping
e.
S- haped
68. The slope of the demand curve for loanable funds can be explained by the slope of the:
a.
marginal resource cost curve.
b.
marginal revenue product curve.
c.
expected rate of return on investment curve.
d.
expected annual earnings curve.
e.
marginal product curve.
c
69. A decrease in the expected rate of return is likely to:
a.
increase the quantity of loanable funds demanded and cause a downward movement along the demand for
loanable funds curve.
b.
decrease the quantity of loanable funds demanded and cause a downward movement along the demand for
loanable funds curve.
c.
increase the quantity of loanable funds demanded and cause an upward movement along the demand for
loanable funds curve.
d.
increase the quantity of loanable funds supplied and cause a downward movement along the supply of
loanable funds curve.
e.
increase the quantity of loanable funds supplied and cause an upward movement along the supply of loanable
funds curve.
a
70. Which of the following will cause a rightward shift of the demand for loanable funds curve?
a.
A decrease in the expected rate of return on investment
b.
An increase in the expected rate of return on investment
c.
An increase in the prices of other resources
d.
A decrease in the expected rate of inflation
e.
A decrease in the price of the product that is produced
c
71. Financial intermediaries bring suppliers and demanders together in the market for:
a.
labor.
b.
loanable funds.
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Chapter 13: Capital, Interest, Entrepreneurship, and Corporate Finance
c.
saving.
d.
physical capital.
e.
human capital.
72. The supply of loanable funds comes, in part, from _____.
a.
consumer saving
b.
business investment
c.
the federal government
d.
current consumption
e.
future consumption
a
73. As the interest rate increases, consumers will tend to:
a.
increase their savings because of increased profit.
b.
decrease savings because of their greater reliance on borrowing.
c.
increase their savings because of the lower opportunity cost of current consumption.
d.
decrease savings because of diminishing marginal utility.
e.
increase savings because of the higher opportunity cost of current consumption.
e
74. Other things constant, the supply of loanable funds curve is:
a.
upward sloping because fewer people have to be persuaded to forgo current consumption as the interest rate
rises.
b.
downward sloping, showing that more investment will be undertaken as inflation decreases.
c.
upward sloping because the reward for saving increases as the interest rate increases.
d.
downward sloping, showing that as more funds are available, the risk of loaning funds decreases.
e.
usually horizontal, showing that the supply of loans is independent of the rate of inflation in an economy.
c
75. The supply of loanable funds curve reflects:
a.
the inverse relationship between the market interest rate and investment, other things constant.
b.
the inverse relationship between the market interest rate and the quantity of saving, other things constant.
c.
the direct relationship between the market interest rate and the investment, other things constant.
d.
the direct relationship between the market interest rate and the quantity of saving, other things constant.
e.
the direct relationship between the market interest rate and the quantity of present consumption, other things
constant.
76. Which of the following is true in the context of the loanable funds market?
a.
Savers are the suppliers of loanable funds, and borrowers are the demanders of loanable funds.
b.
The supply of loanable funds curve slopes downward, and the demand for loanable funds curve slopes upward.
c.
The supply of loanable funds curve reflects the negative relation between the market rate of interest and the
quantity of savings.
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Chapter 13: Capital, Interest, Entrepreneurship, and Corporate Finance
d.
Households play the role of financial intermediaries.
e.
Banks pay a higher interest rate on consumer savings than what they could earn by lending these funds out.
77. If consumers decide to increase their rate of saving, the _____.
a.
supply of loanable funds will decrease
b.
supply of loanable funds will increase
c.
demand for loanable funds will decrease
d.
quantity of loanable funds demanded will increase
e.
quantity of loanable funds supplied will increase
78. If the interest rate increases from 3 to 4 percent, other things constant, individuals will want to _____.
a.
both save and borrow more
b.
both save and borrow less
c.
save more and borrow less
d.
save less and borrow more
e.
borrow more but save the same amount
79. Market interest rates are determined:
a.
by banks.
b.
by the New York Stock Exchange (NYSE).
c.
only by the demand for loanable funds.
d.
only by the supply of loanable funds.
e.
by both the demand for and supply of loanable funds.
80. The loanable funds market brings together savers and borrowers to determine the:
a.
marginal rate of return on investment.
b.
rate of time preference.
c.
market rate of interest.
d.
marginal resource cost of investment.
e.
marginal revenue product of investment.
81. A technological breakthrough that increases the marginal productivity of capital will increase the:
a.
demand for loanable funds, leading to a lower equilibrium market interest rate.
b.
supply of loanable funds, leading to a lower equilibrium market interest rate.
c.
demand for loanable funds, leading to a higher equilibrium market interest rate.
d.
supply of loanable funds, leading to a higher equilibrium market interest rate.
e.
supply of loanable funds, but have no impact on the equilibrium market interest rate.