Core Economics 3e

Capital Markets

Multiple Choice Questions

After watching the Capital Markets video lecture, consider the question(s) below. Then “submit” your response.

Question

1. When economists refer to land as a productive input for a firm, they are not only thinking about land itself but also the:

buildings and machinery that are on the land and that serve as productive inputs.

natural resources that come from the land such as oil, minerals, and trees.

alternative uses for the land such as housing, agriculture or a site for needed infrastructure.

gains that landowners receive from the use of their land in production.

Question

2. Physical capital includes:

all manufactured products used to produce goods and services.

just the machinery required to produce a firm’s goods.

only the buildings used for production.

education and training received by a firm’s physical employees.

Question

3. In addition to land and physical capital, economists consider _____ as factors of production.

raw materials and electricity

good ideas and natural resources

human capital and innovation

market intelligence and strong demand

Question

4. The marginal revenue product of capital is the:

additional revenue generated by selling an additional unit of product.

firm’s average product multiplied by the firm’s average revenue per unit sold.

additional physical output from an additional employee multiplied by the price of the product.

marginal physical product of an additional unit of capital multiplied by the product’s price.

Question

5. Economists use _____ to determine the value today of amounts to be received in the future.

income averaging

present value analysis

gain calculations

arithmetic sums

Question

6. Funds to purchase physical capital and land typically are supplied to new firms by _____ markets which include banks, bond markets, and stock markets.

resource

output

product

financial

Question

7. For the owner of a new business, an advantage of issuing bonds to fund the business is that the owner:

retains complete control of the business and all of the profits.

avoids the financial risks of ownership but maintains control.

gains knowledgeable advisors to help steer the business.

expands the business but shares control and profits.

Question

8. If a business issues stock, it is exchanging a portion of the business’ _____ for current funds to expand the business.

past profits

interest payments

future profits

intellectual property

Question

9. The most important tool for building human capital is:

experience.

education.

young workers.

college.

Question

10. To succeed, economists view businesses as needing _____ to turn physical inputs into valuable outputs.

drive and imagination

skills and experience

ideas and innovation

resources and employees

True/False Questions

After watching the Capital Markets video lecture, consider the question(s) below. Then “submit” your response.

Question

1. The marginal revenue product of an input is determined by multiplying the marginal physical product of an additional unit of input by the input’s cost.

True

False

Question

2. Financial markets, which are sources of financial capital, include banks, bond markets and stock markets.

True

False

Question

3. Human capital only increases when workers have college degrees.

True

False

Short Answer/Discussion Questions

After watching the Capital Markets video lecture, consider the question(s) below. Then “submit” your response.

Question

1. What is present value analysis and how is it useful in economic decision making?

Suggested solution: Present value analysis is a tool that discounts future financial benefits, using current interest rates, in order to determine the value of those benefits today. Because a dollar in the future is worth less than a dollar today, the present value tool enables a comparison of like values when costs and benefits are separated over time.

Question

2. What role does innovation play in making businesses successful?

Suggested solution: Innovation and the ideas it spawns are important because they are the resource that enables all the elements of the business to create value for the firm’s customers. A business without innovation and the ability to create new products or business processes will not be successful in the competitive marketplace against firms trying to improve their position in the market.

Question

3. Contrast stocks and bonds as a source of funding from the standpoint of a business owner.

Suggested solution: Funding from a bond requires the owner to make periodic interest and principal payments. The interest rate depends on perceptions of risk associated with the borrower. No control of the enterprise is surrendered by the business owner. While funding from the sale of stock does not require a defined repayment of the funding, the owner must agree to share the firm’s profits with the stock investor and likely surrenders a proportionate share of the firm’s voting power over corporate decisions.