1. In economics, the term capital refers to
a.
money.
b.
stocks and bonds.
c.
equipment and structures used in production.
d.
All of the above are correct.
2. Capital is paid according to the value of its marginal product
a.
only if earnings from capital are paid to households in the form of dividends.
b.
only if earnings from capital are kept within firms as retained earnings.
c.
regardless of whether earnings from capital are paid to households in the form of dividends or whether those
earnings are kept within firms as retained earnings.
d.
None of the above is correct; unlike labor, capital is a factor of production for which earnings are unrelated to
the value of marginal product.
3. Which of the following best describes the economy’s stock of equipment and structures?
a.
b.
c.
d.
4. Which of the following would be an example of capital for a computer software firm?
(i)
the firm’s computer programmers
(ii)
the wages the firm pays to its computer programmers
(iii)
computer equipment
a.
(i) only
b.
(ii) only
c.
(iii) only
d.
(i) and (iii) only
5. Which of the following would be an example of capital for a retail gasoline station?
(i)
the gas tanks and pumps
(ii)
the service attendants’ time
(iii)
the plot of land on which the station sits
a.
(i) only
b.
(iii) only
c.
(i) and (iii) only
d.
(ii) and (iii) only
6. Which term below refers to “the accumulation of goods produced in the past that are being used in the present to
produce new goods and services”?
a.
inventories
b.
products
c.
factors of production
d.
capital
7. Economists define capital as the
a.
accumulation of goods produced in the past that are being used in the present to produce new goods and
services.
b.
goods and services that are most affected by changes in technology.
c.
factors of production that can be rented by firms.
d.
factors of production that can be purchased by firms.
8. When economists refer to a firm’s capital, they are describing the
a.
markets for final goods and services.
b.
stock of equipment and buildings used in production.
c.
amount of bank financing used by the firm.
d.
amount of financing provided by the equity markets.
9. The accumulation of machinery and buildings used in the production of new goods and services is referred to as
a.
production factors.
b.
output factors.
c.
capital.
d.
equity.
10. If one were to consider a university as a business, the computers in the computer labs would be regarded by
economists as
a.
technology flows.
b.
mechanization flows.
c.
part of the university’s stock of capital.
d.
a flow of services from the university’s stock of capital.
11. The purchase price of capital is
a.
the value of the capital to the firm.
b.
always less than the rental price.
c.
the price received from the flow of some capital services.
d.
the price a person pays to own that factor of production indefinitely.
12. The owners of capital resources are compensated according to the
a.
purchase price of the capital stock.
b.
marginal product of capital.
c.
value of the marginal product of capital.
d.
absolute level of production of final goods and services.
13. Consider the market for capital equipment. Suppose the price of firms’ output increases. Holding all else constant, the
equilibrium rental price of capital equipment will
a.
increase.
b.
decrease.
c.
not change.
d.
It is not possible to determine what will happen to the equilibrium rental price of capital equipment.
14. Consider the market for capital equipment. Suppose the value of the marginal product of capital equipment increases.
Holding all else constant, the equilibrium quantity of capital equipment will
a.
increase.
b.
decrease.
c.
not change.
d.
It is not possible to determine what will happen to the equilibrium quantity of capital equipment.
15. Consider the market for capital equipment. Suppose the market price of firms’ output decreases. Holding all else
constant, the equilibrium quantity of capital equipment will
a.
increase.
b.
decrease.
c.
not change.
d.
It is not possible to determine what will happen to the equilibrium quantity of capital equipment.
16. Which of the following is not correct?
a.
Earnings from capital may be paid to households in the form of dividends.
b.
Earnings from capital may be retained by firms to purchase additional capital.
c.
Firms may not pay out all of their earnings to households.
d.
Firms earn the highest profits when the owners of capital receive a value above the marginal product.
17. The demand curve for capital
a.
is vertical.
b.
is horizontal.
c.
is derived from households’ decisions concerning saving and spending.
d.
reflects the marginal productivity of capital.
18. The equilibrium rental income paid to the owners of capital at any point in time equals the
a.
marginal product of capital.
b.
value of the marginal product of capital.
c.
percentage of profits paid out to stockholders in the form of dividends.
d.
equilibrium purchase price of capital.
19. Consider the market for capital equipment. Suppose the value of the marginal product of capital equipment increases.
Holding all else constant, the equilibrium rental price of capital equipment will
a.
increase.
b.
decrease.
c.
not change.
d.
It is not possible to determine what will happen to the equilibrium rental price of capital equipment.
Figure 18–11
20. Refer to Figure 18–11. What is measured on the vertical axis of the graph?
a.
the rate of technological progress
b.
wages paid to workers in markets where capital goods are produced
c.
wages paid to workers in markets where capital goods are not produced
d.
the rental price of capital
21. Refer to Figure 18–11. Suppose the intersection of the supply and demand curves matches with a value of $200 on the
vertical axis. Then
a.
the marginal product of capital is 200.
b.
the value of the marginal product of capital is $200.
c.
a unit of capital can be purchased for $200.
d.
each worker in markets that produce capital goods earns a wage of $200.
22. The wage is to the labor market as the
a.
rental price of capital is to the capital market.
b.
purchase price of capital is to the capital market.
c.
supply of land is to the land market.
d.
demand for land is to the land market.
23. Which of the following accurately describes how earnings from capital eventually get paid to households?
a.
Households can own a stock of capital and rent it to firms.
b.
Households lend money to firms, who then pay interest to the households.
c.
Households that own stock in firms receive dividends.
d.
All of the above are correct.
24. The rental price of capital is
a.
determined outside the realm of factor markets.
b.
the price paid to use capital for a limited time period.
c.
the price paid for ownership of the capital.
d.
always more than the purchase price.
25. The rental price of capital is determined by the
a.
forces of supply and demand in capital markets.
b.
amount of equity that is generated in equity markets.
c.
amount of bond financing used by profit-maximizing firms.
d.
amount of dividends paid out to stockholders by profit-maximizing firms.
26. Who receives income from capital in the United States?
a.
bank depositors
b.
bondholders
c.
stockholders
d.
All of the above are correct.
27. Which of the following qualify as part of our economy’s capital income?
a.
wages paid to workers
b.
interest paid to the owners of corporate bonds
c.
rent paid on farmland
d.
All of the above are correct.
28. Assume all capital is owned by firms, rather than by households. Under this assumption, capital is paid according to
the value of its marginal product
a.
only if this income is transmitted to households in the form of interest.
b.
only if this income is transmitted to households in the form of dividends.
c.
only if this income is transmitted to households in the form of interest or dividends.
d.
regardless of whether this income is transmitted to households in the form of interest or dividends or whether
it is kept within firms as retained earnings.
29. Suppose that a violent earthquake causes the uninhabited Hawaiian island of Mokuauia (also called Goat Island) to fall
into the Pacific Ocean. No people are killed or injured, and since the island is undeveloped, no buildings are destroyed.
The island was a source of tourist income for Hawaiian landowners. Which of the following statements correctly
describes the rents earned by the people who own land on the surrounding islands?
a.
As the supply of vacation land decreases, the marginal productivity of the remaining land will decrease; thus
rents will decrease.
b.
As the supply of vacation land decreases, the marginal productivity of the remaining land will increase; thus,
rents will decrease.
c.
As the supply of vacation land decreases, the marginal productivity of the remaining land will increase; thus,
rents will increase.
d.
There would be no change in the rents earned by the other landowners because the effects of supply and
demand would exactly cancel each other out.
30. The rental price of land is
a.
the price paid for ownership of the land.
b.
the price paid for the flow of services from land over a specified time period.
c.
always more than the purchase price.
d.
All of the above are correct.
31. Owners of land are compensated according to the
a.
absolute level of production from the land.
b.
number of laborers the land can support.
c.
purchase price of the land stock.
d.
value of the marginal product of land.
32. Suppose the government designates certain areas within a community to be “wetlands,” making it illegal to build on
the land. What happens to land not classified as “wetlands” within the community?
(i)
The price of non-wetland land will rise.
(ii)
The marginal product of non-wetland land will fall.
(iii)
The marginal product of non-wetland land will rise.
a.
(i) and (ii) only
b.
(ii) only
c.
(i) and (iii) only
d.
(iii) only
33. As a result of a labeling mistake at the chemical factory, a farmer accidentally sprays weedkiller rather than fertilizer
on half her land. As a result, she loses half of her productive farmland. If the property of diminishing returns applies to all
factors of production, she should expect to see the marginal productivity of her remaining land
a.
increase.
b.
remain unchanged.
c.
decrease but remain positive.
d.
decrease and become negative.
34. As a result of a labeling mistake at the chemical factory, a farmer accidentally sprays weedkiller rather than fertilizer
on half her land. As a result, she loses half of her productive farmland. If the property of diminishing returns applies to all
factors of production, she should expect to see
a.
an increase in the marginal productivity of her remaining land and an increase in the marginal productivity of
her labor.
b.
an increase in the marginal productivity of her remaining land and a decrease in the marginal productivity of
her labor.
c.
a decrease in the marginal productivity of her remaining land and an increase in the marginal productivity of
her labor.
d.
a decrease in the marginal productivity of her remaining land and a decrease in the marginal productivity of
her labor.
35. The equilibrium rental income paid to landowners at any point in time equals the
a.
purchase price of land.
b.
value of the marginal product of land.
c.
marginal product of land.
d.
wage paid to laborers.
36. The current value of the marginal product of land influences the
a.
demand for land.
b.
equilibrium rental price of land.
c.
equilibrium purchase price of land.
d.
all of the above.