Principles of Microeconomics, 11e -TB1 (Case/Fair/Oster) Chapter 11 Input Demand: The Capital Market and the Investment Decision

11.1 Capital, Investment, and Depreciation

1) Goods produced by the economic system that are used as inputs in the production of future goods and services areA) consumable goods.B) capital goods.C) tangible goods.D) depreciation goods.Answer: BDiff: 1Topic: Capital, Investment, and DepreciationSkill: DefinitionLearning Outcome: Micro-18

2) In the capital market, households ________ supply the financial resources to firms that allow them to purchase ________.A) indirectly; capitalB) directly; capitalC) indirectly; landD) indirectly; laborAnswer: ADiff: 1Topic: Capital, Investment, and DepreciationSkill: ConceptualAACSB: Reflective ThinkingLearning Outcome: Micro-18

3) As the inventory of a firm falls,A) there is no change in its capital.B) its intangible capital decreases.C) its tangible capital decreases.D) its social capital increases.Answer: CDiff: 1Topic: Capital, Investment, and DepreciationSkill: ConceptualAACSB: Reflective ThinkingLearning Outcome: Micro-18

4) Firms that offer to pay for college tuition for their employees are investing in ________ capital.A) tangibleB) productiveC) socialD) humanAnswer: DDiff: 1Topic: Capital, Investment, and DepreciationSkill: ConceptualAACSB: Reflective ThinkingLearning Outcome: Micro-18

5) A clothing manufacturer produced 5,000 sweaters, but sold only 4,000 of them. The remaining 1,000 sweaters would be classified asA) a loss to the firm.B) part of the firm's tangible capital.C) part of the firm's intangible capital.D) a factor of production.Answer: BDiff: 2Topic: Capital, Investment, and DepreciationSkill: ConceptualAACSB: Reflective ThinkingLearning Outcome: Micro-18

6) An example of tangible capital isA) a restaurant's unsold, unopened cans of soda.B) an idea for a new business.C) the goodwill a firm has established through advertising.D) knowledge of how to program a computer.Answer: ADiff: 2Topic: Capital, Investment, and DepreciationSkill: ConceptualAACSB: Reflective ThinkingLearning Outcome: Micro-18

7) The measure of a firm's ________ is the current market value of its plant, equipment, inventories, and intangible assets.A) investmentB) depreciationC) capital stockD) capital flowAnswer: CDiff: 1Topic: Capital, Investment, and DepreciationSkill: DefinitionLearning Outcome: Micro-18

8) A firm's capital is measured as a ________ while investment in new capital is measured as a ________.A) flow; stockB) stock; flowC) stock; changeD) physical amount; dollar valueAnswer: BDiff: 1Topic: Capital, Investment, and DepreciationSkill: ConceptualAACSB: Reflective ThinkingLearning Outcome: Micro-18

9) A university requires that all entering first-year students learn how to use word processing and spreadsheet software. This is an investment in what type of capital? A) tangible B) financial C) human D) productive Answer: CDiff: 2Topic: Capital, Investment, and DepreciationSkill: ConceptualAACSB: Reflective ThinkingLearning Outcome: Micro-18

10) "Goodwill" is an example of A) physical capital. B) intangible capital. C) financial capital. D) a public service industry. Answer: BDiff: 2Topic: Capital, Investment, and DepreciationSkill: ConceptualAACSB: Reflective ThinkingLearning Outcome: Micro-18

11) An example of intangible capital is A) a vacation house. B) a flower garden. C) a book. D) a trained apprenticeship program. Answer: DDiff: 2Topic: Capital, Investment, and DepreciationSkill: ConceptualAACSB: Reflective ThinkingLearning Outcome: Micro-18

12) You take a class that improves your critical thinking skills. This represents an investment in yourA) human capital.B) social capital.C) tangible capital.D) financial capital.Answer: ADiff: 2Topic: Capital, Investment, and DepreciationSkill: ConceptualAACSB: Reflective ThinkingLearning Outcome: Micro-18

13) Capital goods yield benefits A) as soon as the investment decision is made. B) before they are put to use. C) over their life span. D) in the present only. Answer: CDiff: 1Topic: Capital, Investment, and DepreciationSkill: ConceptualAACSB: Reflective Thinking

Learning Outcome: Micro-18

14) The term investment as it is used by an economist refers to A) the creation of new capital. B) the act of buying a share of stock or a bond. C) a household's savings. D) the net worth of a company's financial assets. Answer: ADiff: 1Topic: Capital, Investment, and DepreciationSkill: DefinitionLearning Outcome: Micro-18

15) Which of the following would constitute an act of investment by a household, as economists use the term?A) building a new construction vacation homeB) purchasing 100 shares of Microsoft stockC) buying a corporate bondD) borrowing money from the bank to pay for a vacation cruiseAnswer: ADiff: 2Topic: Capital, Investment, and DepreciationSkill: ConceptualAACSB: Reflective ThinkingLearning Outcome: Micro-18

16) Which of the following would NOT be considered an act of investing in capital? A) a father paying for his daughter's college education B) a firm buying a new energy-saving machine C) the state government building a new road D) the Postal Service delivering the mail Answer: DDiff: 2Topic: Capital, Investment, and DepreciationSkill: ConceptualAACSB: Reflective ThinkingLearning Outcome: Micro-18

17) Depreciation is A) the sum of gross and net investment. B) new additions to a firm's stock of intangible capital. C) the decline in the economic value of an asset over time. D) the decrease in the general price level. Answer: CDiff: 1Topic: Capital, Investment, and DepreciationSkill: Definition

Learning Outcome: Micro-18

18) Which of the following would constitute depreciation, as economists use the term? A) using some of your savings to buy a car B) a GM shareholder selling some of her stock C) inventories of firms decreasing due to an increase in sales D) All new software requires Windows 8, and not Windows 7, as an operating system.Answer: DDiff: 2Topic: Capital, Investment, and DepreciationSkill: ConceptualAACSB: Reflective ThinkingLearning Outcome: Micro-18

19) A capital asset will depreciate because A) it wears out physically. B) a similar product becomes available. C) of an increase in the tax on profits. D) All of the above are correct.Answer: ADiff: 1Topic: Capital, Investment, and DepreciationSkill: ConceptualAACSB: Reflective ThinkingLearning Outcome: Micro-18

20) Related to the Economics in Practice on page 235: India's plan to spend more than 8 billion dollars U.S. to improve its road network is best described as an example of investment inA) intangible capital.B) human capital.C) social capital.D) physical capital.Answer: CDiff: 2Topic: Capital, Investment, and Depreciation: Economics in PracticeSkill: ConceptualAACSB: Reflective ThinkingLearning Outcome: Micro-18

21) Related to the Economics in Practice on page 236: In 2010, Tesla Motors decided to become a public company by offering shares of stock to the public on a stock exchange. Like most other firms, Tesla relied on ________ to manage the sales of stock from its Initial public offering.A) inside managementB) investment banksC) its board of directors

D) the Federal ReserveAnswer: BDiff: 1Topic: Capital, Investment, and Depreciation: Economics in PracticeSkill: FactLearning Outcome: Micro-18

22) Capital is defined as the current market value of a firm's productive assets.Answer: TRUEDiff: 1Topic: Capital, Investment, and DepreciationSkill: DefinitionLearning Outcome: Micro-18

23) Those goods produced by the economic system that are used as inputs in the production of future goods and services are known as capital. Answer: TRUEDiff: 1Topic: Capital, Investment, and DepreciationSkill: DefinitionLearning Outcome: Micro-18

24) Capital stock is the current market value of all of the shares of stock a company has. Answer: FALSEDiff: 1Topic: Capital, Investment, and DepreciationSkill: DefinitionLearning Outcome: Micro-18

25) The funds that firms use to buy capital come directly or indirectly from households. Answer: TRUEDiff: 1Topic: Capital, Investment, and DepreciationSkill: ConceptualAACSB: Reflective ThinkingLearning Outcome: Micro-18

2) When a household lends money directly to a firm, the firm gives the household a A) share of stock. B) certificate of investment. C) bond. D) dividend. Answer: CDiff: 1Topic: The Capital MarketSkill: FactLearning Outcome: Micro-18

3) The stock market, banks, and savings and loans are three examples of institutions that economists would classify as belonging to the financialA) savings markets.B) investment market.C) capital market.D) labor market.Answer: CDiff: 2Topic: The Capital MarketSkill: FactLearning Outcome: Micro-18

4) The two most important forms of capital income are A) rents and profits. B) investments and rents. C) dividends and depreciation. D) interest and profits. Answer: DDiff: 1Topic: The Capital MarketSkill: FactLearning Outcome: Micro-18

5) Capital income includes all of the following EXCEPTA) rents. B) interest. C) profit. D) salary.Answer: DDiff: 1Topic: The Capital MarketSkill: ConceptualAACSB: Reflective ThinkingLearning Outcome: Micro-18

Refer to the data provided in Table 11.1 below to answer the following questions.

Table 11.1

9) Refer to Table 11.1. If the interest rate is 28%, Nashbar Bicycle should A) fund all of the projects. B) fund the remodeling of the distribution center and the on-site day care center. C) fund only the purchase of new notebook computers for its sales staff. D) not fund any of the projects. Answer: DDiff: 2Topic: The Demand for New Capital and the Investment DecisionSkill: AnalyticalAACSB: Analytic SkillsLearning Outcome: Micro-18

10) Refer to Table 11.1. If the interest rate is 20%, Nashbar Bicycle should A) fund only the purchase of new notebook computers for its sales staff. B) fund all of the projects except for the purchase of new notebook computers for its sales staff.C) fund all of the projects.D) not fund any of the projects.Answer: ADiff: 2Topic: The Demand for New Capital and the Investment DecisionSkill: AnalyticalAACSB: Analytic SkillsLearning Outcome: Micro-18

11) Refer to Table 11.1. If the interest rate is 5%, Nashbar Bicycle should A) fund all of the projects. B) not fund any of the projects. C) fund only the employee fitness center. D) fund all of the projects except for the employee fitness center. Answer: ADiff: 2Topic: The Demand for New Capital and the Investment DecisionSkill: AnalyticalAACSB: Analytic SkillsLearning Outcome: Micro-18

Refer to the data provided in Table 11.2 below to answer the following questions.

Table 11.2

15) Refer to Table 11.2. If the interest rate is 11%, then the farmer will onlyA) buy the bookkeeping software.B) buy the bookkeeping software and the grain storage tanks.C) buy the tractor and the irrigation system.D) buy the tractor.Answer: CDiff: 2Topic: The Demand for New Capital and the Investment DecisionSkill: AnalyticalAACSB: Analytic SkillsLearning Outcome: Micro-18

16) Refer to Table 11.2. If the interest rate is 13%, then the farmer will engage in investment ofA) $500,000.B) $600,000.C) $700,000.D) $1,100,000.Answer: ADiff: 2Topic: The Demand for New Capital and the Investment DecisionSkill: AnalyticalAACSB: Analytic SkillsLearning Outcome: Micro-18

17) Refer to Table 11.2. When the interest rate ________, the farmer will engage in no investment.A) is greater than 15%B) is less than 5%C) is less than 15%D) is greater than 5%Answer: ADiff: 2Topic: The Demand for New Capital and the Investment DecisionSkill: AnalyticalAACSB: Analytic SkillsLearning Outcome: Micro-18

7) Assume the current interest rate is 25%. The present value of $1,000 in one year would be A) $180. B) $450. C) $750. D) $800. Answer: DDiff: 2Topic: Appendix: Calculating Present ValueSkill: AnalyticalAACSB: Analytic SkillsLearning Outcome: Micro-18

8) Tom's Donuts can invest in a new espresso machine that costs $300 and will yield expected profits of $200 each year for two years. What is the present discounted value of the expected profits from this investment if the interest rate is 5%? A) $185.93 B) $276.64 C) $371.89 D) $380.96 Answer: CDiff: 3Topic: Appendix: Calculating Present ValueSkill: AnalyticalAACSB: Analytic SkillsLearning Outcome: Micro-18

9) Tom's Donuts can invest in a new espresso machine that costs $300 and will yield expected profits of $200 each year for two years. At lower interest rates, the present discounted value of profits from the investment A) increases.B) decreases.C) is unchanged.D) is indeterminate from the given information.Answer: ADiff: 2Topic: Appendix: Calculating Present ValueSkill: AnalyticalAACSB: Analytic SkillsLearning Outcome: Micro-18