Question 1

Which of the following best defines 'capital' in the context of microeconomics?

Accepted Answer

Goods produced by the economic system that are used as inputs to produce other goods and services in the future.

Question 2

A firm is considering an investment that will yield $$500 in one year and 500 in $$two years. If the market interest rate is 10%, what is the present discounted value (PDV) of this investment? Use the formula $$ PDV = \frac{R_1$}{(1+r)^1$} + \frac{R_2$}{(1+r)^2$} .$$

Accepted Answer

$$ PDV = \frac{500}{1.1} + \frac{500}{(1.1)^2$} = 454.55 + 413.22 = 867.77 $$

Question 3

Which of the following is an example of intangible capital?

Accepted Answer

The skills and knowledge acquired by workers through education and training.

Question 4

Suppose a firm’s investment project has an internal rate of return (IRR) of 8%. If the market interest rate rises from 6% to 9%, what should the firm do?

Accepted Answer

Not undertake the investment because the IRR is now less than the market interest rate.

Question 5

Which of the following best describes the role of the capital market in the economy?

Accepted Answer

It is the input market where households supply savings to firms that demand funds for capital goods.

Question 6

A firm is considering two investment projects. Project A has a present value of $$1,200 and costs 1$$,000. Project B has a present value of $$900 and costs 1$$,000. Which project(s) should the firm undertake?

Accepted Answer

Only Project A, because its present value exceeds its cost.

Question 7

Which of the following is NOT a function of interest in the capital market?

Accepted Answer

A reward for innovation and risk taking.

Question 8

If the present value of an investment’s expected stream of earnings is less than the cost of the investment, what should a firm do?

Accepted Answer

Not undertake the investment because the financial market can generate the same income for a smaller initial investment.

Question 9

Which of the following best explains why not all households invest all their financial wealth in equities, even though equities yield higher returns in the long run?

Accepted Answer

Equities are riskier than government bonds, and households have different risk preferences.

Question 10

A $$1,000 bond pays 50 $$per year in interest. What is the bond’s interest rate?

Accepted Answer

$$ 5\% $$

Question 11

Which of the following is an example of social capital?

Accepted Answer

A city’s public transportation system.

Question 12

If a firm’s marginal revenue product of capital (MRPK) is less than the interest rate, what should the firm do?

Accepted Answer

Reduce its capital stock.

Question 13

Which of the following statements about investment is correct?

Accepted Answer

Investment is a flow, measured over a period of time.

Question 14

A firm is evaluating a project that will yield $$2,000 in three years. If the interest rate is 5%, what is the present value of this future payment? Use $$ PDV = \frac{R}{(1+r)^t} $.

Accepted Answer

$$ PDV = \frac{2000}{(1.05)^3$} = 1727.68 $$

Question 15

Which of the following is a correct statement about the relationship between interest rates and present value?

Accepted Answer

As interest rates increase, present value decreases.

Question 16

Which of the following is a plausible reason for a risk premium to exist in financial markets?

Accepted Answer

To compensate investors for the risk of uncertain future payments.

Question 17

A firm’s capital stock is best measured as:

Accepted Answer

The total value of its physical plant, equipment, inventories, and intangible assets at a point in time.

Question 18

Which of the following is an example of capital income?

Accepted Answer

Interest earned on savings.

Question 19

Why is it important for the economy to have a diverse pool of entrepreneurs, as discussed in the context of women-owned startups?

Accepted Answer

It helps eliminate barriers and can lead to higher returns and innovation.

Question 20

Which of the following best describes the function of profit in the capital market?

Accepted Answer

Profit serves as a reward for innovation and risk taking.

Input Demand: The Capital Market and the Investment Decision – Microeconomics Study Notes

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