Questions and Problems

Check Your Understanding

1. Question

   What does the term land refer to in economics and why is it very inelastic in supply?

   Prob 12 1. What does the term land refer to in economics and why is it very inelastic in supply?

2. Question

   If the interest rate is 6% and you are offered a bond that will pay you $2,000 in two years, but no interest between now and then, what would you be willing to pay for this bond today?

   Prob 12 2. If the interest rate is 6% and you are offered a bond that will pay you $2,000 in two years, but no interest between now and then, what would you be willing to pay for this bond today?

3. Question

   What are the different ways in which businesses can acquire financial capital?

   Prob 12 3. What are the different ways in which businesses can acquire financial capital?

4. Question

   Why are colleges filled with young people rather than middle-aged individuals? If interest rates rose to over 10%, would this have any impact on the number of people attending college or its composition?

   Prob 12 4. Why are colleges filled with young people rather than middle-aged individuals? If interest rates rose to over 10%, would this have any impact on the number of people attending college or its composition?

5. Question

   What is the difference between physical capital and human capital?

   Prob 12 5. What is the difference between physical capital and human capital?

6. Question

   What do intellectual property rights protect and why is it important to entrepreneurship?

   Prob 12 6. What do intellectual property rights protect and why is it important to entrepreneurship?

Apply the Concepts

7. Question

   How do times of growth in the general economy encourage capital investments? How do recessions discourage capital investments? What happens to the cost of capital in boom times when the economy is growing? What happens in recessionary times?

   Prob 12 7. How do times of growth in the general economy encourage capital investments? How do recessions discourage capital investments? What happens to the cost of capital in boom times when the economy is growing? What happens in recessionary times?

8. Question

   Cities such as London and Johannesburg spent billions in capital expenditures building new stadiums, roads, and public transportation to host the 2012 Summer Olympics and the 2010 World Cup, respectively, in hopes of generating a spike in future tourism and business investment. Explain how these cities would use a rate of return approach to determine whether the effort to host the sporting event was worthwhile.

   Prob 12 8. Cities such as London and Johannesburg spent billions in capital expenditures building new stadiums, roads, and public transportation to host the 2012 Summer Olympics and the 2010 World Cup, respectively, in hopes of generating a spike in future tourism and business investment. Explain how these cities would use a rate of return approach to determine whether the effort to host the sporting event was worthwhile.

9. Question

   Suppose you wish to purchase a corporate bond that offers a coupon rate of 10% in the bond market. On a particular day, you notice the price of the bond listed as greater than “100.” Given this price, would the yield on this bond be greater than or less than 10%? List some possible reasons that would cause the price of the bond to exceed “100.”

   Prob 12 9. Suppose you wish to purchase a corporate bond that offers a coupon rate of 10% in the bond market. On a particular day, you notice the price of the bond listed as greater than “100.” Given this price, would the yield on this bond be greater than or less than 10%? List some possible reasons that would cause the price of the bond to exceed “100.”

10. Question

    When a company uses resources to train staff or subsidize tuition for employees, it is clearly investing in human capital. However, this investment is treated as current spending (cost of selling or producing goods) rather than investment. Should these activities be treated as investments and be reflected in the investment statistics of the economy?

    Prob 12 10. When a company uses resources to train staff or subsidize tuition for employees, it is clearly investing in human capital. However, this investment is treated as current spending (cost of selling or producing goods) rather than investment. Should these activities be treated as investments and be reflected in the investment statistics of the economy?

11. Question

    Does it seem reasonable that a certain portion of the benefits of a college education is essentially a way to show prospective employers that you are reasonably intelligent, trainable, and have a certain degree of discipline?

    Prob 12 11. Does it seem reasonable that a certain portion of the benefits of a college education is essentially a way to show prospective employers that you are reasonably intelligent, trainable, and have a certain degree of discipline?

12. Question

    Some politicians during any election campaign offer proposals to make college more affordable by increasing subsidies through higher Pell grants and subsidizing reduced rate loans. If these policies come to pass, and college becomes less expensive, more people will attend college. What will this do to the rate of return on a college education?

    Prob 12 12. Some politicians during any election campaign offer proposals to make college more affordable by increasing subsidies through higher Pell grants and subsidizing reduced rate loans. If these policies come to pass, and college becomes less expensive, more people will attend college. What will this do to the rate of return on a college education?

In the News

13. Question

    A December 13, 2012, article in the Los Angeles Times, “Colorado River Water Supply to Fall Short of Demand…” highlighted the concern regarding the ability of the Colorado River, the primary source of water for the greater Los Angeles area residents, to fulfill the needs as the river continues to decrease in water flow. Using a market diagram, show what happens to water prices if the supply of water, a natural resource, is fixed each year while demand continues to increase due to population growth. If the article’s predictions come true and the supply decreases, show what happens to the price of water.

    Prob 12 13. A December 13, 2012, article in the Los Angeles Times, “Colorado River Water Supply to Fall Short of Demand…” highlighted the concern regarding the ability of the Colorado River, the primary source of water for the greater Los Angeles area residents, to fulfill the needs as the river continues to decrease in water flow. Using a market diagram, show what happens to water prices if the supply of water, a natural resource, is fixed each year while demand continues to increase due to population growth. If the article’s predictions come true and the supply decreases, show what happens to the price of water.

14. Question

    Steve Wynn is a billionaire Las Vegas casino tycoon who built famous hotels such as the Mirage, Bellagio, Wynn, and Encore resorts. In 2012, he announced a plan to invest $4 billion to build his third hotel in Macao, a tiny former Portuguese colony near Hong Kong that has been returned to China (“Wynn Macao Plans to Invest $4 Billion for New Resort,” Bloomberg.com, June 5, 2012). The size of the investment surprised analysts, because the gaming market in Macao, while still the world’s largest in total revenue, has begun to slow in recent years. What are some market factors influencing the present value of Wynn’s future earnings that might justify his decision to build such a lavish resort?

    Prob 12 14. Steve Wynn is a billionaire Las Vegas casino tycoon who built famous hotels such as the Mirage, Bellagio, Wynn, and Encore resorts. In 2012, he announced a plan to invest $4 billion to build his third hotel in Macao, a tiny former Portuguese colony near Hong Kong that has been returned to China (“Wynn Macao Plans to Invest $4 Billion for New Resort,” Bloomberg.com, June 5, 2012). The size of the investment surprised analysts, because the gaming market in Macao, while still the world’s largest in total revenue, has begun to slow in recent years. What are some market factors influencing the present value of Wynn’s future earnings that might justify his decision to build such a lavish resort?

Solving Problems

15. Question

    Suppose you win the lottery and are given a choice to collect either the grand prize of $6 million in 20 annual installments of $300,000, or collect an immediate one-time payment of $4 million today. If the interest rate is 5% and that is what you use to discount future earnings, which option should you select to maximize the present value of the winnings?

    Prob 12 15. Suppose you win the lottery and are given a choice to collect either the grand prize of $6 million in 20 annual installments of $300,000, or collect an immediate one-time payment of $4 million today. If the interest rate is 5% and that is what you use to discount future earnings, which option should you select to maximize the present value of the winnings?

16. Question

    The mayor of your city is considering building a new toll road to reduce congestion. The cost of the toll road is $10 million and is estimated to generate a profit (from tolls collected less expenses collecting the tolls and maintaining the road) of $1.5 million per year. If the discount rate is 10%, how many years would it take before the road is paid for? (Hint: Calculate the present value of the annual profit—for year 1, discount $1.5 million by 10%.)

    Prob 12 16. The mayor of your city is considering building a new toll road to reduce congestion. The cost of the toll road is $10 million and is estimated to generate a profit (from tolls collected less expenses collecting the tolls and maintaining the road) of $1.5 million per year. If the discount rate is 10%, how many years would it take before the road is paid for? (Hint: Calculate the present value of the annual profit—for year 1, discount $1.5 million by 10%.)

17. Question

    According to By the Numbers, in the year 2011 (the last year for which data are reported) approximately what percentage of high school graduates attended college? Approximately what percentage of college graduates attended a graduate program?

    Prob 12 17. According to By the Numbers, in the year 2011 (the last year for which data are reported) approximately what percentage of high school graduates attended college? Approximately what percentage of college graduates attended a graduate program?

18. Question

    According to By the Numbers, by approximately what percentage did venture capital funding fall from its peak in 2007 to its lowest point in 2010?

    Prob 12 18. According to By the Numbers, by approximately what percentage did venture capital funding fall from its peak in 2007 to its lowest point in 2010?