Question 1

Which of the following best describes economic rent?

Accepted Answer

A payment for the use of any resource over and above its opportunity cost.

Question 2

A famous athlete earns $$20 million per year, but would still play for 2 $$million. According to economic theory, what is the economic rent earned by this athlete?

Accepted Answer

$18 million

Question 3

Which of the following is NOT an example of an implicit cost?

Accepted Answer

Wages paid to employees

Question 4

A firm has total revenues of $$500,000, explicit costs of 300$$,000, and implicit costs of $150,000. What is the firm's economic profit?

Accepted Answer

$50,000

Question 5

Which of the following statements about the normal rate of return is correct?

Accepted Answer

It is the opportunity cost of capital and is considered a cost of production.

Question 6

Suppose you want to have $$1,210 in two years. If the annual interest rate is 10% compounded annually, how much must you deposit today? (Use the present value formula: PV$$ = \frac{FV}{(1 + r)^n}$)

Accepted Answer

$$PV = \frac{1210}{(1 + 0.10)^2$} = 1000$$

Question 7

Which of the following best explains why the interest rate is important in the allocation of resources?

Accepted Answer

It allocates loanable funds to projects with the highest expected returns.

Question 8

A corporation issues bonds with a face value of $10,000 and a coupon rate of 5%. What is the annual coupon payment to the bondholder?

Accepted Answer

$500

Question 9

Which of the following is a key difference between common stock and preferred stock?

Accepted Answer

Common stockholders have voting rights; preferred stockholders usually do not.

Question 10

If the nominal interest rate is 8% and the anticipated inflation rate is 3%, what is the real interest rate?

Accepted Answer

$$5\%$$

Question 11

Which of the following is NOT a main source of corporate funds?

Accepted Answer

Government grants

Question 12

According to the theory of efficient markets, which of the following is true?

Accepted Answer

All available information is already reflected in stock prices.

Question 13

A business owner uses her own building for her company, but could rent it out for $30,000 per year. If she does not include this in her cost calculations, what is she ignoring?

Accepted Answer

Implicit cost

Question 14

Which of the following best describes the random walk theory?

Accepted Answer

There are no predictable trends in securities prices that can be used to 'get rich quick.'

Question 15

A corporation earns $$1,000,000 in total revenue, pays 600$$,000 in explicit costs, and has $250,000 in implicit costs. What is its accounting profit and economic profit, respectively?

Accepted Answer

Accounting profit: $$400,000; Economic profit: 150$$,000

Question 16

If a state government lowers the interest rate used to discount future pension payments, what happens to the present value of those payments?

Accepted Answer

The present value increases.

Question 17

Which of the following is an example of an explicit cost for a business?

Accepted Answer

Wages paid to employees

Question 18

A firm is considering an investment that will return $$2,000 in one year. If the market interest rate is 8%, what is the present value of this investment? (Use PV$$ = \frac{FV}{1 + r}$)

Accepted Answer

$$PV = \frac{2000}{1.08} = 1851.85$$

Question 19

Which of the following is true about bonds issued by corporations?

Accepted Answer

They are legal claims against the firm and usually pay fixed annual coupon payments.

Question 20

Why might attempts to 'punish' a company by selling its stock fail to lower its share price in the long run, according to the efficient market hypothesis?

Accepted Answer

Other investors anticipate the price will rebound and buy the stock, pushing the price back up.

Rents, Profits, and the Financial Environment of Business

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