9) ________ natural resources are natural resources that can be used repeatedly, and ________
natural resources are natural resources that can be used only once.
A) Nonrenewable; renewable
B) Renewable; hydrocarbon
C) Renewable; nonrenewable
D) Non-fossil; fossil
10) Which of the following is a nonrenewable resource?
A) residential land
B) sunshine
C) a machine tool
D) oil
11) The proposition that the price of a resource is expected to rise at a rate equal to the interest
rate is called the
A) discounted present value.
B) derived demand for productive resources.
C) diminishing marginal revenue product.
D) Hotelling Principle.
12) According to the Hotelling Principle, the price of an nonrenewable resource
A) falls slowly over time.
B) falls at a rate equal to the interest rate.
C) rises at a rate equal to the interest rate.
D) remains constant over time.
13) According to the Hotelling Principle, the price of a nonrenewable resource is expected to
A) rise at a rate higher than the interest rate.
B) rise at a rate lower than the interest rate.
C) rise at a rate equal to the interest rate.
D) fall at a rate equal to the interest rate.
14) The price of an nonrenewable resource is expected to rise at a rate equal to the
A) rate of supply.
B) rate of population growth.
C) rate of demand.
D) interest rate.
15) Next year’s expected price of oil is $88 per barrel and the interest rate is 10 percent per year.
According to the Hotelling Principle the price of oil this year is
A) $80 per barrel.
B) $88 per barrel.
C) $96 per barrel.
D) None of the above answer is correct.
16) If a nonrenewable natural resource’s price is expected to increase at a rate faster than the
interest rate, then the supply today will
A) the supply today will increase.
B) the supply today will decrease.
C) the demand today will decrease.
D) the price today will fall.
17) Next year’s expected price of oil is $90 per barrel. If the interest rate climbs from 5 percent to
20 percent per year and nothing else changes, then according to the Hotelling Principle the price
of oil this year
A) will rise.
B) will fall.
C) will not change.
D) could rise, fall, or stay the same.
18) An increase in the marginal product of capital shifts the
A) supply of capital curve rightward.
B) supply of capital curve leftward.
C) demand for capital curve rightward.
D) demand for capital curve leftward.
19) Which of the following lowers the current price of an nonrenewable natural resource?
A) an increase in the interest rate
B) a decrease in the stock of the resource
C) an increase in the marginal revenue product of the resource
D) an increase in the price of a substitute resource
20) For a nonrenewable natural resource, such as oil, the equilibrium price ________ the market
fundamentals price.
A) is always the same as
B) can be greater than but not less than
C) can be less than but not greater than
D) can be less than, greater than, or equal to
21) If people suddenly start to expect the price of oil to rise less rapidly than the interest rate, the
demand for oil ________ and the supply of oil ________.
A) increases; increases
B) increases; decreases
C) decreases; decreases
D) decreases; increases
22) If the price of a barrel of oil is $100 this year and the interest rate is 10 percent, then
according to the Hotelling Principle the price next year is expected to be ________ per barrel.
A) $90
B) $110
C) $100
D) None of the above is correct.
5 News Based Questions
1) Lynn owns Dust Bunnies, a cleaning company. In one week, she is able to clean 9 houses. If
she hires an employee, together they are able to clean 15 houses per week. If Lynn charges $100
to clean a house, what is the marginal product of her employee?
A) 9 houses
B) 15 houses
C) $1,500
D) 6 houses
2) Lynn owns Dust Bunnies, a cleaning company. In one week, she is able to clean 9 houses. If
she hires an employee, together they are able to clean 15 houses per week. If Lynn charges $100
to clean a house, what is the value of marginal product of her employee?
A) 6 houses
B) 9 houses
C) $600
D) $900
3) Lynn owns Dust Bunnies, a cleaning company. In one week, she is able to clean 9 houses. If
she hires an employee, together they are able to clean 15 houses per week. If Lynn charges $100
to clean a house, and she pays her employee $400 a week, should she hire this employee?
A) Yes, because the value of marginal product of the worker is less than the wage.
B) Yes, because the value of marginal product of the worker is greater than the wage.
C) No, because the value of marginal product of the worker is greater than the wage.
D) No, because the value of marginal product of the worker is less than the wage.
4) Linda Evangelista, a supermodel, once said that she “won’t get out of bed for less than
$10,000 a day.” This fee is an example of
A) a reservation wage.
B) the demand for Linda’s labor.
C) a competitive labor market.
D) the substitution effect.
5) Pennsylvania’s largest grower of fresh-to-market tomatoes announced in March 2009 he will
no longer produce the crop because he can’t find enough workers to harvest it. Though his
tomato pickers made an average of $16.59 per hour last year, he said the relatively high wage is
not enough to attract local labor to work the fields. In the market for tomato workers, what is
TRUE?
A) $16.59 is above the equilibrium wage rate
B) $16.59 is the equilibrium wage rate
C) $16.59 is below the equilibrium wage rate
D) Cannot determine where the equilibrium wage rate is in comparison to $16.59 without more
information.
6) Pennsylvania’s largest grower of fresh-to-market tomatoes announced in March 2009 he will
no longer produce the crop. The acreage he previously devoted to tomatoes and pumpkins will be
converted to field corn that is harvested by machines. Of the following, which could have led to
the shift from labor intensive tomato production to field corn?
A) The market price of tomatoes increased.
B) Farm workers’ reservation wage fell.
C) The wage rate for farm workers increased.
D) All of the answers are true.
7) In November 2008, the air traffic controllers who work at Guam became unionized. What
would NOT be a way for the union to influence labor demand?
A) Have monthly training which improves the marginal productivity of the air traffic controllers.
B) Support minimum wage laws.
C) Creating job certification which limits the number of newly certified air traffic controllers.
D) Lobby the government to limit who can apply to be an air traffic controller in Guam to those
who are certified through the union.
8) Americans are always connected today, talking on the phone at home, while driving down the
road and while shopping for groceries. But that wasn’t always the case. In fact, it wasn’t that long
ago people had to go through an operator in order to get connected with the person they were
trying to reach. How do cell phones impact the labor market for telephone operators?
A) Decreased telephone operators’ value of marginal product
B) Increased the demand for telephone operators
C) Increased the supply for telephone operators
D) Decreased the marginal productivity of telephone operators
9) According to a 1963 edition of the Effingham Daily News, Illinois Consolidated Telephone
Co. switched from the switchboard system to the dial system at 12:01 a.m. Sunday, Aug. 18,
1963. Thirty miles of cable supported the new high-tech system. It took four weeks to lay the
telephone lines that allowed Effingham residents to directly connect to each other through the
telephone. How does the switch from the switchboard system to the dial system impact the labor
market for switchboard operators?
A) Increased the demand for telephone operators
B) Increased the supply for telephone operators
C) Decreased the marginal productivity of telephone operators
D) Decreased telephone operators’ value of marginal product
10) S & S Backhoe Service in Ozark, Arkansas rents backhoes and other heavy equipment to
local construction companies. What determines the demand for backhoes in Arkansas?
A) The rental rate for backhoes
B) The equilibrium quantity of backhoes
C) The value of marginal product of backhoes
D) The maximum number of backhoes available to rent
11) An auction of the leases to drill for natural gas on about 55,000 acres on the Roan Plateau in
western Colorado in August 2008 generated nearly $114 million, a record for onshore energy
lease sales in the lower 48 states. Is natural gas a renewable or non-renewable resource? Why?
A) Renewable, because the resource can be recycled
B) Non-renewable, because the used resource cannot be reused
C) Non-renewable, because the value of marginal product for natural gas is diminishing
D) Renewable, because oil, natural gas, and coal are traded in global community markets
12) An auction of the leases to drill for natural gas on about 55,000 acres on the Roan Plateau in
western Colorado in August 2008 generated nearly $114 million, a record for onshore energy
lease sales in the lower 48 states. What is the most likely reason companies are leasing this land?
A) Increasing natural gas prices lead to an increased value of marginal product for an acre on the
Roan Plateau.
B) Increasing natural gas prices lead to an increased supply of acres on the Roan Plateau.
C) The future price of natural gas is expected to increase leading to an increased supply of acres
on the Roan Plateau,
D) The value of marginal product of natural gas is diminishing.
13) An auction of the leases to drill for natural gas on about 55,000 acres on the Roan Plateau in
western Colorado in August 2008 generated nearly $114 million, a record high for onshore
energy lease sales in the lower 48 states. What is going on in the rental market for land?
A) There is a decrease in the value of marginal product for an acre on the Roan Plateau, leading
to an increase in the equilibrium rental rate.
B) There is an increase in the value of marginal product for an acre on the Roan Plateau, leading
to a decrease in the equilibrium rental rate.
C) There is an increase in the supply of acreage on the Roan Plateau, leading to an increase in the
equilibrium rental rate.
D) There is an increase in the value of marginal product for an acre on the Roan Plateau, leading
to an increase in the equilibrium rental rate.
6 Mathematical Note: Present Value and Discounting
1) The present value of a future sum of money is the amount that, if invested today, will grow
A) as large as that future sum, given the interest rate.
B) at a constant rate forever.
C) as large as that future sum, less taxes payable.
D) as large as that future sum, if the interest rate is zero.
2) Discounting is the process whereby
A) present values are adjusted to their future value, using the interest rate.
B) future values are converted to their value today, using the interest rate.
C) product prices are reduced (discounted) to increase sales and profits today.
D) future values are adjusted for inflation.
3) The process of converting a future amount of money into its value today is called
A) trending.
B) depreciation.
C) discounting.
D) compounding.
4) Whenever you discount a future sum of money into its present value, you must know
I. the interest rate.
II. the number of years in the future in which the money will be received.
A) only I
B) only II
C) both I and II
D) neither I nor II
5) Assuming r is the interest rate, to compute the present value of a dollar to be received a year
from today, you
A) multiply the dollar by r.
B) divide the dollar by (1 – r).
C) multiply the dollar by (1 + r).
D) divide the dollar by (1 + r).
6) If the interest rate falls, the present value of $100 to be received in one year
A) rises.
B) falls.
C) is unaffected.
D) might rise, fall, or not change.
7) If the interest rate increases from 5 percent to 7 percent, the present value of a future payment
A) rises.
B) falls.
C) is unaffected.
D) might either rise or fall.
8) An increase in the interest rate
A) lowers the present value of future revenue.
B) increases the present value of future revenue.
C) has no effect on the present value of future revenue.
D) shifts the demand curve for capital leftward.
9) The present value of a stream of future revenues varies ________ with the future revenues and
________ with the interest rate.
A) inversely; inversely
B) directly; directly
C) inversely; directly
D) directly; inversely
10) The present value of $100 to be received in a year is
A) less than $100 and falls as the interest rate rises.
B) less than $100 and rises as the interest rate rises.
C) more than $100 and falls as the interest rate rises.
D) more than $100 and rises as the interest rate rises.
11) The present value of $100 to be received in the year 2014 is
A) less than the present value of $100 to be received in 2015.
B) greater than the present value of $100 to be received in 2015.
C) the same as the present value of $100 to be received in 2015.
D) greater than the present value of $100 to be received in 2015 if the interest rate in 2015
exceeds the interest rate in 2014; otherwise, it is less.
12) If the interest rate is 20 percent, $100 to be received four years from today has a present
value of approximately
A) $48.
B) $69.
C) $80.
D) $100.
13) A rational individual would be indifferent between ________ today and ________ four years
from today if the interest is 20 percent.
A) $100, $100
B) $48, $100
C) $30, $100
D) $100, $48
14) Suppose the interest rate is 5 percent per year. The present value of $210 to be received one
year from today is
A) $200.00.
B) $210.00.
C) $215.00.
D) $220.50.
15) The present value of $50 to be received next year is $40. The interest rate is
A) 10 percent.
B) 20 percent.
C) 25 percent.
D) 50 percent.
16) The value in one year of $25 invested today at an annual interest rate of 5 percent will be
A) $25.00.
B) $26.25.
C) $27.50.
D) $30.00.
17) If the interest rate is 10 percent, the present value of a payment of $1,000 one year from
today is
A) $900.
B) $909.
C) $1,000.
D) $1,100.
18) At an interest rate of 5 percent, the present value of $1,000 to be received two years from
today is
A) less than $875.
B) between $875 and $925.
C) between $925 and $975.
D) more than $975.
19) At an interest rate of 5 percent, the present value of $1,000 to be received three years from
today is
A) less than $875.
B) between $875 and $925.
C) between $925 and $975.
D) more than $975.
20) An investment pays $100 at the end of each of the three next years. No additional payments
will ever be made. If the annual interest rate is 5 percent, the present value of the investment is
approximately
A) $250.
B) $272.
C) $288.
D) $300.
21) St. Mary’s Church has a balloon payment of $100,000 due on its mortgage in two years. If
the interest rate is 8 percent, the present value of St. Mary’s balloon mortgage payment is
A) $100,000.00.
B) $116,640.00.
C) $85, 733.88.
D) None of the above answers is correct.
22) The interest rate is 8 percent. The present value of $110 three years from now equals
A) $101.85.
B) $94.31.
C) $118.80.
D) $128.30.
23) The present value of a $5,000 cash gift to be received four years in the future, given an
annual interest rate of 6 percent, is (to the nearest dollar)
A) $4700.
B) $4717.
C) $6312.
D) $3960.
24) If the interest rate is 10 percent, the present value of $400 to be received one year from today
is about
A) $440.
B) $390.
C) $364.
D) $377.
25) If the interest rate is 4 percent, the present value of $10,000 to be received one year from
today is about
A) $9,246.
B) $9,615.
C) $10,816.
D) $10,400.
26) If the interest rate is 10 percent, the present value of $400 to be received two years from
today is about
A) $331.
B) $484.
C) $364.
D) $440.
27) Homer has been saving to buy a new car in five years and expects that the car of his dreams
will cost $35,000. If the interest rate is 8 percent per year, how much money should Homer have
in his bank account today in order to have enough money to buy the car in 5 years?
A) $1,852.28
B) $22,055.94
C) $23,820.41
D) $25,726.04
28) If the interest rate is 5 percent, what is the present value of $100 that will be received 3 years
from now?
A) $90.70
B) $86.38
C) $115.00
D) $13.62
29) What is the present value of $200 one year from now when the interest rate is 6 percent?
A) $125.00
B) $188.68
C) $212.00
D) $320.00
30) What is the present value of $1,000 to be received 2 years in the future with an interest rate
of 8 percent?
A) $857.34
B) $925.93
C) $1080.00
D) $1166.40
31) If the interest rate is 4 percent, the present value of $10,000 to be received two years from
today is about
A) $9,246.
B) $9,615.
C) $10,816.
D) $10,400.
32) If the interest rate is 8 percent, the present value of $10,000 to be received 10 years from
today is about
A) $21,589.
B) $9,259.
C) $4,632.
D) $10,800.
33) If the interest rate is 20 percent, the present value of $10,000 to be received 20 years from
today is about
A) $6,944.
B) $14,400.
C) $383,376.
D) $261.
34) If Delores wanted to make sure that she had $3,000 a year from now, how much would she
need to save now if the interest rate is 7 percent?
A) $3000
B) $2804
C) $2790
D) $2666
35) A company is considering the purchase or the rental of a new machine. An increase in the
interest rate
A) increases the likelihood the company will buy the machine.
B) increases the likelihood the company will rent the machine.
C) has no effect on the likelihood that the company will buy the machine.
D) has no effect on the likelihood that the company will rent the machine.
36) Starbucks is considering opening a new store on the Drexel University Campus in
Philadelphia. To analyze this decision Starbucks must compare the costs of starting the new
store, which will be incurred today, with the profit the store will create in the future. When
making this decision, the higher is the interest rate, the ________ is the discounted present value
of the profits and the ________ likely Starbucks will be to open the store.
A) higher; more
B) higher; less
C) lower; more
D) lower; less
7 Essay Questions
1) Why is the demand for labor a “derived demand?”
2) What is the value of marginal product of labor? What is the formula that can be used to
calculate it? How does the value of marginal product affect how much labor a firm hires?
3) “As the quantity of labor hired increases, the value of marginal product stays constant as long
as the wage rate is constant for all workers.” Is the previous statement correct or incorrect?
Explain your answer.
4) “The decision to employ an additional unit of labor depends on whether the value of marginal
product is greater than or smaller than the wage rate.” Is the previous statement correct or
incorrect?
5) What is the relationship between a firm’s value of marginal product curve for labor and its
demand for labor curve? Explain why this relationship exists.