ECON 291 Study Guide - Quiz Guide: Stockout, Real Interest Rate, Fixed Investment

80 views2 pages

reddonkey15

26 Jun 2018

School

Simon Fraser University

Department

Economics

Course

ECON 291

Professor

Junjie Liu

For unlimited access to Study Guides, a Grade+ subscription is required.

Econ 291 Tutorial Questions Ch.10

Name Student ID #

1. In the neoclassical model of business fixed investment, under what conditions will firms find

it profitable to add to their capital stock?

In the neoclassical model of business fixed investment, firms will find it profitable to add to

their capital stock if the marginal product of capital is greater than the cost of capital. The

cost of capital depends on the real interest rate, the depreciation rate, and the relative price of

capital goods.

2. What is Tobin’s q, and what does it have to do with investment?

Tobin’s q is the ratio of the market value of installed capital to its replacement cost.

If q is greater than one, then the stock market values installed capital at more than it costs to

replace. This creates an incentive to invest, because managers can raise the market value of

their firms’ stock by buying more capital. Conversely, if q is less than one, then the stock

market values installed capital at less than its replacement cost. In this case, managers will

not replace capital as it wears out.

find more resources at oneclass.com

Unlock document

This preview shows half of the first page of the document.
Unlock all 2 pages and 3 million more documents.

Already have an account? Log in

Document Summary

In the neoclassical model of business fixed investment, firms will find it profitable to add to their capital stock if the marginal product of capital is greater than the cost of capital. Tobin"s q is the ratio of the market value of installed capital to its replacement cost. If q is greater than one, then the stock market values installed capital at more than it costs to replace. This creates an incentive to invest, because managers can raise the market value of their firms" stock by buying more capital. Conversely, if q is less than one, then the stock market values installed capital at less than its replacement cost. In this case, managers will not replace capital as it wears out. Ch. 10: use the neoclassical model of investment to analyze the impact of each of the following on the rental price of capital, the cost of capital, and investment, anti-inflationary monetary policy raises the real interest rate.

Related Questions

1- Milton Friedman viewed current income as the sum of permanent income and:

A) bonus income. B) transitory income. C) temporary income. D) surprise income.

2- Permanent and transitory income differ in the way that permanent income is ______ than is transitory income.

A) larger B) more persistent C) taxed at a higher rate D) more variable

3- If consumers have rational expectations and follow the permanent-income hypothesis, their current consumption will increase when:

A) previously announced tax reductions are implemented.

B) they receive an anticipated raise.

C) they receive an unexpected inheritance.

D) they make the last payment on their automobile loan

4- Consumers with time-inconsistent preferences:

A) base consumption decisions on transitory rather than permanent income.

B) seek to consume more in retirement than during their working years.

C) may alter decisions simply because time passes.

D) face borrowing constraints that prevent rational behavior.

5- The most volatile component of real GDP is:

A) consumption spending. B) government spending. C) investment spending. D) net exports.

6-If the capital stock is fixed and something happens to raise the marginal product of capital (MPK) for any given quantity of capital, then the real rental price of capital will:

A) remain the same. B) rise. C) fall. D) fall and then rise.

7- The investment spending component of GDP includes all of the following except:

A) business fixed investment. B) net foreign investment. C) residential investment. D) inventory investment.

8- The real cost of capital is the:

A) purchase price of a unit of capital divided by the price level.

B) purchase price of a unit of capital minus the rate of inflation.

C) cost of a unit of capital less the marginal product of capital.

D) cost of buying and renting out a unit of capital measured in units of the economy's output.

9- The profit rate of a firm that rents capital is equal to:

A) the marginal product of capital minus the cost of capital.

B) the cost of capital minus the marginal product of capital.

C) zero.

D) a negative number, if it is adding to its capital stock.

10- Other things being equal, the neoclassical model of investment predicts that net investment will increase when the:

A) marginal product of capital falls.

B) price of new capital goods rises.

C) real interest rate falls.

D) depreciation rate rises.

11- If Tobin's q is greater than 1, then managers should:

A) increase the capital stock of the firm.

B) maintain the existing capital stock of the firm.

C) allow inventories to run down.

D) decrease the capital stock of the firm.

12- According to Keynes, movements in stock prices:

A) follow a random walk.

B) reflect rational valuations of underlying economic fundamentals.

C) result when new information becomes available.

D) are often driven by irrational waves of optimism and pessimism.

Q. Write your opinion about the below paragraph? Also, mention any example?

Topic: Your accountant has just told you that your company is losing money. Why might you decide to stay in business anyway?

I would decide to stay in the business because in the short run most costs are fixed in nature. If the business is wound up even then committed fixed cost (unavoidable cost) will continue. After winding up, it is difficult to restart the same business as it would require huge capital and will have fewer customers' confidence.

Whereas if the business is continued during loss or boom period, the business can recover the variable cost (avoidable) and some contribution towards the fixed costs.

Therefore I will consider some situations like shut down or break-even point.

Break-even point is a level of output for a price where firms do not make loss or profit.

Shutdown point occurs when the price of the product is comparatively very low to average total cost (ATC). In this scenario, temporary shut down is the good option.

Q. Write your opinion about the below paragraph? Also, mention any example?

Government bailouts are both good and bad. Good because it infuses cash into the company and instead of all their costs being sunk costs, they can recover some of the capital spent on the government bail out. Moreover, with new capital manufacturers could resume production. However, infusing cash artificially into the system could lead to waste as some managers would to be lazy and not actively adopt cost-saving methods. However, the chances of economic inefficiency during the 2002 bailout would have been low since with government bailouts there was tight oversight and the manufacturing companies were under pressure to bounce-back quickly. So firms bailed out during that period laid off a lot of employees and cut down wages to save costs. This type of drastic cost saving methods can disrupt the optimal level of production along the expansion path, as the labor vs. capital changes would disproportionate.

QUESTION 16

Which of the following statements is true?

		The administrative costs per dollar are greater for a large loan than a small loan.
		The risk on a long-term loan is likely to be less than on a short-term loan, ceteris paribus.
		a and b
		none of the above

1 points

QUESTION 17

If the price for loanable funds is less than the return on capital, then firms will

		borrow in the loanable funds market and invest in capital goods, and as this happens, the quantity of capital decreases and its return rises.
		borrow in the loanable funds market and invest in capital goods, and as this happens, the quantity of capital increases and its return falls.
		not borrow in the loanable funds market, and over time the capital stock will decrease and the return on capital will fall.
		not borrow in the loanable funds market, and over time the capital stock will decrease and the return on capital will rise.

1 points

QUESTION 18

Economic rent is

		the payment a renter pays his or her landlord.
		payment in excess of fixed costs.
		payment in excess of opportunity costs.
		the same as interest if we are discussing a capital good purchase.
		none of the above

1 points

QUESTION 19

Suppose a bank makes a $1,000 loan to you at 5 percent interest when the expected and actual inflation rate are zero percent. Before you pay back the $1,000 principal and $50 interest, the inflation rate increases to 10 percent. Does anyone lose from this situation?

		Nobody loses, because the terms were set before the inflation rate increased, and once the terms are set, inflation does not affect the situation.
		You lose, because the dollars that you have borrowed are worth more the higher the inflation rate.
		The banker loses, because you will be paying back the loan with dollars that are worth less than the dollars you borrowed.
		Both the banker and you lose, for the reasons in answers b and c.
		There is not enough information to answer the question.

1 points

QUESTION 20

A change in the expected rate of inflation from 5 percent to 3 percent will

		decrease the real interest rate by 2 percentage points.
		decrease the real interest rate by 3 percentage points.
		increase the nominal interest rate by 2 percentage points.
		decrease the nominal interest rate by 2 percentage points.

ECON 291 Study Guide - Quiz Guide: Stockout, Real Interest Rate, Fixed Investment

Document Summary

Get access

Related Documents

ECON 291 Study Guide - Midterm Guide: Global Saving Glut, Capital Account, United States Dollar

ECON 2000 Lecture Notes - Lecture 88: Stock Market

ECON 2000 Lecture Notes - Lecture 91: Cash Flow, Investment Goods, Capital Accumulation

Related Questions