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CHAPTER 29

Rent, Interest, and Profit

Topic 1. 2. 3. 4. 5. 6. 7. 8. 9. Economic rent Land taxation Interest rate concept Loanable funds theory of interest Structure and impact of interest rates Nominal and real interest rates Usury laws Profit Income shares Consider This Last Word True-False

Question numbers 1-21 22-27 28-33 34-47 48-56 57-64 65-69 70-79 80-86 87-88 89-92 93-103

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Multiple Choice Questions Economic rent

0. In year 1, the nominal rate of interest is 7% and the inflation rate is 3%. The real rate of interest in year 1:
A) is 7% B) cannot be determined from the information given C) is 10% D) is 4% Answer: D Type: D Topic: 1 E: 542 MI: 298 1. Economic or pure rent is: A) a payment made for the use of housing, factory buildings, or capital goods. B) a payment for resources used in the production of "free goods." C) a payment for the use of those resources whose supply is perfectly elastic. D) the price paid for the use of land and other nonreproducible resources. Answer: D

Type: A Topic: 1 E: 543 MI: 299 2. To say that land rent performs no incentive function means that: A) higher rental payments will not bring forth a larger quantity of land. B) rent is not a cost to specific firms but it is a cost from the standpoint of the economy as a whole. C) rent does not allocate land in terms of productive efficiency.

Chapter 29: Rent, Interest, and Profit

D) rent tends to allocate land into the most productive uses. Answer: A

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Type: D Topic: 1 E: 542 MI: 298 3. Which of the following statements is correct? A) Economic profits can properly be regarded as the salaries received by the hired managers of corporations. B) Economic rent is a price paid for productive resources whose supply is perfectly inelastic. C) Economic profits would be nonexistent in a dynamic, purely competitive economy. D) Economic or pure profit is the minimum return which entrepreneurs must receive to continue in a particular line of production. Answer: B

Type: D Topic: 1 E: 543 MI: 299 4. Economic rent refers to the price paid for land and other natural resources that: A) are fixed in total supply. C) vary inversely with their market prices. B) vary directly with their market prices. D) are available in nearly unlimited quantities. Answer: A

Use the following to answer questions 5-6:

Type: G Topic: 1 E: 543 MI: 299 5. Refer to the above diagram. Land: A) will cease to be used in production if demand falls below D .
4

B) would be a free resource if demand is D or less.


4

C) would be an economic (scarce) resource in the case of all four demand curves. D) would be a free resource in the case of all four demand curves. Answer: B

Type: G Topic: 1 E: 543 MI: 299 6. Refer to the above diagram. If demand is D , a tax of A per acre will:
2

A) encourage the substitution of land for other productive resources. B) lower the cost of land to individual farmers. C) reduce the demand for land to, say, D or D .
3 4

D) not affect the quantity of land available to society. Answer: D

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Chapter 29: Rent, Interest, and Profit

Type: G Topic: 1 E: 543 MI: 299 7. Landowners will not receive any rent so long as: A) there is any tax on land. B) the supply and demand curves for land intersect. C) the supply curve of land is perfectly inelastic. D) the supply curve lies entirely to the right of the demand curve. Answer: D

Type: A Topic: 1 E: 543 MI: 299 8. The incentive function of prices: A) indicates that price increases bring forth more of a resource. B) is the idea that competitive markets will always clear. C) applies to all resources. D) only applies to land. Answer: A

Type: A Topic: 1 E: 543 MI: 299 9. The demand for farmland will increase if: A) the demand for food decreases. B) technological advances make land more productive. C) the price of farm labor increases and the output effect exceeds the substitution effect. D) the supply of farmland increases. Answer: B

Type: A Topic: 1 E: 543 MI: 299 10. The supply of land is: A) almost perfectly inelastic. B) negatively sloped. Answer: A

C) relatively elastic.

D) perfectly elastic.

Type: D Topic: 1 E: 543 MI: 299 11. Economic rent is: A) nonexistent in a static, purely competitive economy. B) the price paid for a resource that has a perfectly inelastic supply. C) the price paid for a resource that has a perfectly elastic supply. D) equal to the pure rate of interest if all markets are competitive. Answer: B

Type: A Topic: 1 E: 543 MI: 299 12. Which of the following is correct? A) Although land has no production cost from society's viewpoint, rental payments are costs to individual producers. B) Land rent is not a cost to either society or to individual producers. C) Although land rent is a cost from society's viewpoint, it is not a cost to individual producers. D) Land rent is a cost to both society and individual producers. Answer: A

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Type: A Topic: 1 E: 543 MI: 299 13. The total supply of land is: A) upsloping. B) perfectly elastic. Answer: C

C) perfectly inelastic. D) greater in the short run than in the long run.

Type: A Topic: 1 E: 543-545 MI: 299-301 14. The rent paid for the pasture land used to graze cattle would increase if: A) the productivity of the land increased. C) oil deposits were discovered on the land. B) people decided to consume more beef. D) any of the above occurred. Answer: D

Use the following to answer questions 15-16:

Type: G Topic: 1 E: 543 MI: 299 15. Refer to the above diagrams. Assume that only wheat can be grown on the three grades of land shown in Figures a, b, and c. Also assume that identical amounts of labor, capital, and other needed inputs are used in farming each grade of land. On the basis of these three figures we: A) can say that the land in Figure a is most productive. B) can say that the land in Figure b is most productive. C) can say that the land in Figure c is most productive. D) cannot compare the productivity of the three grades of land. Answer: C

Type: G Topic: 1 E: 543 MI: 299 16. Refer to the above diagrams. Assume that only wheat can be grown on the three grades of land shown in Figures a, b, and c. Also assume that identical amounts of labor, capital, and other needed inputs are used in farming each grade of land. On the basis of these three figures we can say that: A) the land shown in both Figures (a) and (b) is a "free good." B) the land shown in Figure (a) only is a "free good." C) the land shown in all three figures is a "free good." D) land is not a "free good" in any of the three figures. Answer: B

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Use the following to answer questions 17-21:


(1 ) L and R ent $400 300 200 100 0 (2 ) Q u a n tity S u p p lie d 60 60 60 60 60 (3 ) Q u a n tity D em anded 40 50 60 70 80 (4 ) Q u a n tity D em anded 30 40 50 60 70 (5 ) Q u a n tity D em anded 10 20 30 40 50

Type: T Topic: 1 E: 543 MI: 299 Status: New 17. Refer to the above table, in which the values for columns (2) through (5) are in acres. If the relevant columns are (1), (2), and (3), land rent will be: A) $100 per acre. B) $200 per acre. C) $300 per acre. D) $400 per acre. Answer: B

Type: T Topic: 1 E: 543 MI: 299 Status: New 18. Refer to the above table, in which the values for columns (2) through (5) are in acres. If the relevant columns are (1), (2), and (4), land rent will be: A) $100 per acre. B) $200 per acre. C) $300 per acre. D) $400 per acre. Answer: A

Type: T Topic: 1 E: 543 MI: 299 Status: New 19. Refer to the above table, in which the values for columns (2) through (5) are in acres. If the relevant columns are (1), (2), and (5), land rent will be: A) $0 per acre. B) $100 per acre. C) $200 per acre. D) $300 per acre. Answer: A

Type: T Topic: 1 E: 543 MI: 299 Status: New 20. Refer to the above table, in which the values for columns (2) through (5) are in acres. Positive land rent will occur if the relevant columns are: A) (1), (2), and (3) only. C) (1), (2), and (4) and (1), (2), and (5). B) (1), (2), and (3) and (1), (2), and (5). D) (1), (2), and (3) and (1), (2), and (4). Answer: D

Type: T Topic: 1 E: 543 MI: 299 Status: New 21. Refer to the above table, in which the values for columns (2) through (5) are in acres. Zero land rent will occur if the relevant columns are: A) (1), (2), and (3) only. C) (1), (2), and (5) only. B) (1), (2), and (4) and (1), (2), and (5). D) (1), (2), and (3) and (1), (2), and (4). Answer: C

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Land taxation

Type: F Topic: 2 E: 544 MI: 300 22. The economist who advocated a single tax on land was: A) Adam Smith. B) John Maynard Keynes. C) Henry George. Answer: C

D) Milton Friedman.

Type: A Topic: 2 E: 544 MI: 300 23. A unique characteristic of taxes on economic rents is that such taxes: A) stimulate aggregate production. C) are paid by consumers. B) do not lead to a reallocation of the resource. D) are always regressive. Answer: B

Type: A Topic: 2 E: 544 MI: 300 24. Henry George's single tax movement was based on the argument that: A) the tax structure should consist solely of a highly progressive tax on nonwage incomes. B) interest is unearned income and should be taxed away by government. C) in less developed countries the supply of and demand for land will be such that land will be a free good and therefore capable of bearing sizable taxes. D) a high tax on land rent is justified because land rent performs no incentive function. Answer: D

Type: F Topic: 2 E: 544 MI: 300 25. In his Progress and Poverty, Henry George argued that: A) poverty is associated with the personal characteristics of individuals and therefore cannot be remedied by government antipoverty programs. B) economic rent could be heavily taxed without impairing the supply of land or therefore the production capacity of the economy. C) rents should not be taxed because rental income is the basic source of saving, which ultimately permits a high level of investment and economic growth. D) taxes on rents are undesirable because they have a severe disincentive effect on landlords. Answer: B

Type: F Topic: 2 E: 544 MI: 300 26. Henry George advocated a single tax on: A) real capital. B) entrepreneurial profits. Answer: C

C) land.

D) labor income.

Type: A Topic: 2 E: 544 MI: 300 27. Some economists advocate taxes on land because such taxes: A) do not affect the supply of land. B) increase the supply of land. C) improve the allocation of land by shifting it from low-productivity to high-productivity uses. D) have a positive incentive function. Answer: A

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Interest rate concept

Type: A Topic: 3 E: 545 MI: 301 Status: New 28. Interest is the: A) price paid for the use of money. B) opportunity cost of time. Answer: A

C) expectation of a future return on investment. D) reward for consuming rather than saving.

Type: A Topic: 3 E: 545 MI: 301 Status: New 29. Suppose a person pays $80 of annual interest on a loan that has a 5 percent annual interest rate. The loan amount is: A) $400. B) $1600. C) $160. D) $85. Answer: B

Type: A Topic: 3 E: 545 MI: 301 Status: New 30. Suppose a loan customer is considering two alternative $22,000 loans. Loan 1 requires payment of $1,100 of interest each year and Loan 2 has a 6 percent annual interest rate. Other things equal, the loan customer will: A) be indifferent between the two loans because they both have the same annual percentage rate. B) reject both loans because they each carry too high an interest rate. C) choose Loan 1 because it has a lower annual interest rate than Loan 2. D) choose Loan 2 because it has a lower annual interest rate than Loan 1. Answer: C

Type: A Topic: 3 E: 545 MI: 301 31. Suppose that interest payments are $140 per year on a $1000 loan and $1188 per on a $8485 loan. The interest rates on the two loans are: A) 14 percent and 20 percent, respectively. C) 18.8 percent on both loans. B) 14 percent on both loans. D) 1.4 percent and 11.8 percent, respectively. Answer: B

Type: A Topic: 3 E: 545 MI: 301 32. Which of the following is correct? A) Money is a resource, but real capital is not. B) Real capital is a resource, but money is not. Answer: B

C) Neither money nor real capital is a resource. D) Both money and real capital are resources.

Type: A Topic: 3 E: 546 MI: 302 33. The equilibrium interest rate equates: A) nominal and real interest rates. B) the quantities demanded and supplied of loanable funds. C) consumption and saving. D) taxes and government spending. Answer: B

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Loanable funds theory of interest

Type: A Topic: 4 E: 546 MI: 302 34. The supply curve of loanable funds is upsloping because: A) businesses find more investments to be profitable at low interest rates than at high interest rates. B) households are willing to save more at high interest rates than they are at low interest rates. C) government budget deficits vary inversely with the equilibrium interest rate. D) banks lend more at low interest rates than they do at high interest rates. Answer: B

Type: A Topic: 4 E: 546 MI: 302 35. The fact that people prefer present consumption to future consumption results in: A) a downsloping demand for loanable funds curve. B) an upsloping supply of loanable funds curve. C) a downsloping supply of loanable funds curve. D) an upsloping demand for loanable funds curve. Answer: B

Type: A Topic: 4 E: 546 MI: 302 36. Which of the following is not a source of loanable funds? A) the saving of households C) commercial bank lending B) business saving D) government budget deficits Answer: D

Type: A Topic: 4 E: 546 MI: 302 37. Which of the following is not a component of the demand for loanable funds? A) household purchases of housing and durable consumer goods B) business purchases of capital goods C) government financing of the public debt D) household saving Answer: D

Type: A Topic: 4 E: 546 MI: 302 38. The demand for loanable funds is downsloping: A) because businesses find that more investments are profitable at low interest rates than at high interest rates. B) because households are willing to save more at high interest rates than at low interest rates. C) only when the nominal interest rate exceeds the real interest rate. D) because the amount of profitable business investment varies directly with the interest rate. Answer: A

Type: A Topic: 4 E: 547 MI: 303 39. Other things equal, an increase in the productivity of capital goods will: A) increase the demand for loanable funds and decrease the equilibrium interest rate. B) increase the demand for loanable funds and increase the equilibrium interest rate. C) increase the supply of loanable funds and decrease the equilibrium interest rate. D) increase the supply of loanable funds and increase the equilibrium interest rate.

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Answer: B

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Type: A Topic: 4 E: 547 MI: 303 40. If Congress were to pass a law exempting interest on saving from taxation, the: A) supply of loanable funds would decrease and the equilibrium interest rate rise. B) supply of loanable funds would increase and the equilibrium interest rate fall. C) demand for loanable funds would increase and the equilibrium interest rate rise. D) equilibrium interest rate would be unaffected. Answer: B

Type: A Topic: 4 E: 547 MI: 303 41. A doubling of Social Security benefits is likely to: A) decrease the demand for loanable funds and increase the equilibrium interest rate. B) increase the supply of loanable funds and decrease the equilibrium interest rate. C) decrease the supply of loanable funds and increase the equilibrium interest rate. D) increase the real interest rate but not the nominal interest rate. Answer: C

Type: A Topic: 4 E: 547 MI: 303 42. In the market for loanable funds: A) an increase in bank lending will increase the interest rate. B) a decrease in saving will reduce the interest rate. C) an increase in borrowing for investment will increase the interest rate. D) a decrease in government borrowing will increase the interest rate. Answer: C

Use the following to answer questions 43-47:

S G

In te re s t R a te

F E D
1

Q u a n tity

Type: G Topic: 4 E: 546 MI: 302 43. Refer to the above diagram. The demand for loanable funds curve D slopes downward because:
1

A) B) C) D)

business will borrow more funds at lower interest rates than at higher ones. at lower interest rates households will make more funds available for lending. at lower interest rates, households will consume more and save less. business will borrow more funds at higher interest rates than at lower ones.

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Answer: A

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Type: G Topic: 4 E: 546 MI: 302 44. Refer to the above diagram. The supply of loanable funds curve S slopes upward because:
1

A) business will borrow more funds at lower interest rates than at higher ones. B) at higher interest rates households will make more funds available for lending. C) at lower interest rates, households will consume less and save more. D) business will borrow more funds at higher interest rates than at lower ones. Answer: B

Type: G Topic: 4 E: 546 MI: 302 45. Refer to the above diagram. If the supply of loanable funds is S and the demand for loanable funds is D ,
1 1

the equilibrium interest rate and quantity of funds borrowed will be: A) G and A. B) F and A. C) F and C. D) E and A. Answer: B

Type: G Topic: 4 E: 546 MI: 302 46. Refer to the above diagram. If the supply of loanable funds is S and the demand for loanable funds is D ,
0 0

the equilibrium interest rate and quantity of funds borrowed will be: A) G and A. B) F and A. C) F and C. D) E and A. Answer: C

Type: G Topic: 4 E: 547 MI: 303 47. Refer to the above diagram. Suppose that the demand for loanable funds is D and the supply of loanable
0

funds initially is S . If the supply of loanable funds declines to S , the equilibrium interest rate will:
0 1

A) decline from G to F. B) increase from E to F. C) decline from F to E. D) increase from F to G. Answer: D

Structure and impact of interest rates

Type: A Topic: 5 E: 548 MI: 304 48. Other things equal, interest rates are: A) higher on large loans than on small loans. B) higher on loans with tax-exempt interest payments. C) lower on less risky loans than on riskier loans. D) lower on short-term loans than on long-term loans. Answer: C

Type: A Topic: 5 E: 548 MI: 304 49. Which of the following generalizations is false? Other things equal: A) interest rates are higher if lenders are imperfectly, rather than purely, competitive. B) the interest rate is less on small loans than on larger loans. C) long-term loans normally command higher interest rates than short-term loans. D) the greater the risk on a loan, the greater the interest rate. Answer: B

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Type: D Topic: 5 E: 548-549 MI: 304-305 50. The pure rate of interest is approximated by the: A) rate which savings and loan associations charge on mortgage loans. B) rate charged consumers by credit card companies. C) rate paid on long-term government bonds. D) announced rate at which commercial banks make business loans. Answer: C

Type: D Topic: 5 E: 548-549 MI: 304-305 51. The pure rate of interest refers to the: A) nominal rate of interest adjusted for inflation. B) nominal rate of interest. C) interest rate paid on virtually riskless long-term bonds. D) rate which large banks charge their corporate borrowers. Answer: C

Type: C Topic: 5 E: 549 MI: 305 52. A lower equilibrium interest rate: A) increases saving, reduces total spending, and increases total output. B) decreases saving, increases total spending, and decreases total output. C) increases investment, increases total spending, and increases total output. D) decreases investment, decreases total spending, and increases total output. Answer: C

Type: A Topic: 5 E: 549 MI: 305 53. The equilibrium interest rate: A) allocates the available supply of loanable funds to investment projects that have high enough rates of return to justify the borrowing. B) rises when the supply of loanable funds increases. C) is the price paid for the use of any resource. D) effects the size of total output but not the composition of that output. Answer: A

Type: A Topic: 5 E: 549 MI: 305 54. The equilibrium interest rate: A) affects both the size of total output and its composition. B) falls when the demand for loanable funds increases. C) determines the composition of R&D spending but not its total amount. D) increases when the expected rate of return on R&D spending falls. Answer: A

Type: C Topic: 5 E: 549 MI: 305 55. Other things equal, an increase in the equilibrium interest rate will: A) increase R&D spending. B) rise when the supply of loanable funds increases. C) decrease purchases of capital goods and reduce R&D spending. D) increase bank lending. Answer: C

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Type: A Topic: 5 E: 549 MI: 305 56. Changes in the equilibrium interest rate will: A) affect both the size of the domestic output and the allocation of capital goods among industries. B) affect the size of the domestic output, but not the allocation of capital goods among industries. C) affect the allocation of capital goods among industries, but not the size of the domestic output. D) have no perceptible effect on either the size of the domestic output or the allocation of capital goods among industries. Answer: A

Nominal and real interest rates

Type: D Topic: 6 E: 549 MI: 305 57. The real rate of interest is: A) the interest rate charged on long-term government bonds. B) the interest rate associated with a riskless loan. C) the interest rate that large commercial banks charge their best customers. D) the interest rate after adjustment has been made for inflation. Answer: D

Type: A Topic: 6 E: 549-550 MI: 305-306 58. The real interest rate can be estimated by: A) subtracting the pure interest rate from the nominal interest rate. B) dividing the nominal interest rate by the consumer price index. C) subtracting the nominal interest rate from the rate of inflation. D) subtracting the rate of inflation from the nominal interest rate. Answer: D

Type: A Topic: 6 E: 549 MI: 305 59. In year 1 the price level is constant and the nominal rate of interest is 6 percent. But in year 2 the inflation rate is 3 percent. If the real rate of interest is to remain at the same level in year 2 as it was in year 1, then in year 2 the nominal interest rate must: A) rise by 9 percentage points. C) fall by 3 percentage points. B) rise by 3 percentage points. D) rise by 6 percentage points. Answer: B

Type: A Topic: 6 E: 548-549 MI: 304-305 60. The pure interest rate is: A) the nominal rate plus the rate of inflation. B) not used in making investment decisions. C) is the nominal rate of interest less the rate of return on an investment. D) the rate paid on long term, relatively risk-free bonds. Answer: D

Type: A Topic: 6 E: 549 MI: 305 61. The XYZ Corporation can make a real (inflation-adjusted) return on an investment of 9 percent. The nominal rate of interest is 13 percent and the rate of inflation is 7 percent. We can conclude that the: A) investment will be profitable. C) real rate of interest is 4 percent.

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B) investment will be unprofitable. Answer: A

D) real rate of interest is 2 percent.

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Type: A Topic: 6 E: 549-550 MI: 305-306 62. Which of the following is incorrect? A) The nominal interest rate is the rate of interest expressed in terms of current dollars. B) The real interest rate is the rate of interest expressed in terms of dollars of constant or inflation-adjusted value. C) The nominal interest rate is the real interest rate less the rate of inflation. D) During periods of inflation the nominal interest rate will exceed the real interest rate. Answer: C

Type: A Topic: 6 E: 549 MI: 305 63. Suppose that in some year nominal interest rates are less than the rate of inflation. This means that: A) money demand exceeds money supply. B) real interest rates are negative. C) real interest rates are positive and unusually high. D) real interest rates exceed nominal interest rates. Answer: B

Type: A Topic: 6 E: 549 MI: 305 64. In making an investment decision a business firm is most interested in the: A) nominal interest rate. B) real interest rate. C) nominal interest rate minus the real interest rate. D) the future supply of loanable funds. Answer: B

Usury laws

Type: A Topic: 7 E: 550 MI: 306 65. Effective usury laws cause: A) a surplus in the market for loanable funds. B) the quantity of loanable funds demanded to be brought into balance with the quantity supplied. C) the quantity of loanable funds demanded to exceed the quantity supplied. D) the quantity of loanable funds supplied to exceed the quantity demanded. Answer: C

Type: A Topic: 7 E: 550 MI: 306 66. Usury laws: A) allocate funds from low-productivity to high-productivity investments. B) establish a legal ceiling on interest rates. C) make more funds available to low-income borrowers. D) create a surplus of loanable funds. Answer: B

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Type: A Topic: 7 E: 550 MI: 306 67. Effective usury laws cause: A) a surplus of money in money markets. B) the quantity of money demanded to be brought into balance with the quantity supplied. C) the quantity of money demanded to exceed the quantity supplied. D) the quantity of money supplied to exceed the quantity demanded. Answer: C

Type: A Topic: 7 E: 550 MI: 306 68. Effective usury laws: A) subsidize lenders. B) penalize those who borrow at the below-market interest rate. C) improve efficiency in investing. D) keep some low-income people from obtaining credit and loans. Answer: D

Type: A Topic: 7 E: 550 MI: 306 69. A major purpose of usury laws is to make more funds available to low-income borrowers. Economic analysis suggests that usury laws: A) are effective in achieving this goal. B) allocate available funds to high-income borrowers. C) have no impact on the allocation of funds between high-income and low-income people. D) help low-income people only when the legal interest rate is above the market rate. Answer: B

Profit

Type: A Topic: 8 E: 551-552 MI: 307-308 70. Economic profit is most closely associated with: A) the process of saving and investing. B) monopoly, innovation, and uninsurable risks. Answer: B

C) long-run competitive equilibrium. D) a static economy.

Type: A Topic: 8 E: 551 MI: 307 71. In long-run equilibrium there will be no economic profit in a purely competitive static economy because: A) barriers to entry will prevent profit from arising. B) there will be no uncertainty, no innovations, and no monopoly. C) there will be no need for professional managers and therefore no profit rewards will be needed. D) the marginal revenue product of capital will be zero. Answer: B

Type: A Topic: 8 E: 551 MI: 307 72. In a purely competitive static economy: A) the demand for loanable funds would disappear. B) uncertainty would increase, causing profit to rise. C) economic profit would be zero. D) economic profit would be maximized.

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Answer: C

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Type: A Topic: 8 E: 551 MI: 307 73. Which of the following represents an uninsurable risk to a business firm? A) the possibility that its warehouse will burn down B) the possibility that several of its workers will be injured at work C) the possibility that an adverse change in consumer tastes will decrease the demand for the firm's product D) the possibility that a tornado will damage the plant and stop production for a month Answer: C

Type: G Topic: 8 E: 424 MI: 180 74.

On the basis of the above diagram we can say that the firm is earning: A) a normal profit. B) an economic profit. C) neither a normal nor an economic profit. D) total revenue insufficient to cover its total costs. Answer: A

Type: A Topic: 8 E: 551 MI: 307 75. Economic profit might result from: A) easy entry into industries B) dynamic change and uncertainty. Answer: B

C) x-inefficiency. D) a decline in entrepreneurship

Type: D Topic: 8 E: 551 MI: 307 76. A normal profit is: A) the average profitability of a firm over one complete business cycle. B) calculated by subtracting explicit costs from total revenue. C) the return required to retain entrepreneurial talent in some particular line of production. D) the amount by which total revenue exceeds total costs. Answer: C

Type: A Topic: 8 E: 551 MI: 307 77. The entrepreneur: A) makes routine day-to-day business decisions. B) is a colorful figure from the past who is rarely relevant in today's complex economy. C) introduces innovations in the form of new products or new production processes. D) receives income mainly as wages.

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Answer: C

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Type: D Topic: 8 E: 551 MI: 307 78. Pure or economic profit is: A) the amount by which total revenue exceeds total costs. B) determined by subtracting explicit costs from total revenue. C) the return required to retain entrepreneurial talent in some particular line of production. D) the return to any resource the supply of which is perfectly inelastic. Answer: A

Type: A Topic: 8 E: 552 MI: 308 79. Economic profit affects: A) the allocation of resources, but not the level of resource use. B) the level of resource use, but not the allocation of resources. C) the allocation of resources and the level of resource use. D) neither the allocation of resources nor the level of resource use. Answer: C

Income shares

Type: F Topic: 9 E: 554 MI: 310 80. The largest single share of the national income consists of: A) wages and salaries. B) interest. C) rents. D) corporate profits. Answer: A

Type: F Topic: 9 E: 554 MI: 310 81. Currently capitalist income, that is, corporate profits, interest, and rent, accounts for about what percentage of the national income? A) 10 percent B) 20 percent C) 50 percent D) 80 percent Answer: B

Type: F Topic: 9 E: 554 MI: 310 82. If labor's share of the national income is narrowly defined as wages and salaries, we can say that labor's relative share of national income: A) declined between 1900 and 1940, but has increased since 1940. B) has remained constant since 1900. C) has increased since 1900. D) has fallen since 1900. Answer: C

Type: F Topic: 9 E: 554 MI: 310 83. If labor's share of the national income is broadly defined as the sum of wages and salaries and proprietors' income, we can say that labor's relative share has: A) remained approximately constant since 1900. B) increased dramatically at the expense of capitalist income. C) declined by about one-third since 1900. D) decreased because of the decline of unionism. Answer: A

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Type: F Topic: 9 E: 554 MI: 310 84. Capitalist income (corporate profits, interest, and rent) has: A) declined sharply since 1900 because of the growing strength of labor unions. B) remained approximately constant in this century. C) increased significantly because of rising rents. D) fallen in this century because of the declining importance of corporations. Answer: B

Type: F Topic: 9 E: 554 MI: 310 85. Defined narrowly as wages and salaries, labor's share of the national income is about: A) 70 percent. B) 50 percent. C) 40 percent. D) 90 percent. Answer: A

Type: F Topic: 9 E: 554 MI: 310 86. Interest, rent, and corporate profits combined account for about what percentage of the national income? A) 80 percent B) 55 percent C) 35 percent D) 20 percent Answer: D

Consider This Questions

Type: A E: 547 MI: 303 Status: New 87. (Consider This) The story about economist Irving Fisher's conversation with his masseuse illustrates that: A) other things equal, interest rates are higher on smaller loans than on larger loans. B) interest is a payment required for someone to give up the present use of their money. C) other things equal, longer term loans have lower interest rates than shorter-term loans. D) real interest rates differ from nominal interest rates. Answer: B

Type: A E: 547 MI: 303 Status: New 88. (Consider This) The story about economist Irving Fisher's conversation with his masseuse illustrates that interest payments arise because of: A) the possibility of inflation. C) imperfect information about the future. B) the reality of credit risk. D) the time-value of money. Answer: D

Last Word Questions

Type: A E: 553 MI: 309 89. (Last Word) Suppose you borrow $500 and agree to pay this $500 plus $75 of interest at the end of a year. The interest rate is: A) 10 percent. B) 15 percent. C) 12.5 percent. D) 7.5 percent. Answer: B

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Type: A E: 553 MI: 309 90. (Last Word) Suppose you borrow $500 for a year and the lender discounts $75 of interest at the time the loan is made. The interest rate on this loan is about: A) 12.5 percent. B) 14 percent. C) 18 percent. D) 10 percent. Answer: C

Type: A E: 553 MI: 309 91. (Last Word) Suppose you deposit $5,000 in a bank which pays 10 percent interest compounded twice a year. The actual annual interest rate you receive is: A) 10 percent. B) 11 percent. C) 10.25 percent. D) 12 percent. Answer: C

Type: A E: 553 MI: 309 92. (Last Word) Suppose you borrow $10,000 for one year and must pay $1,000 in interest at the end of the year. If you are required to repay the loan principle in 12 equal monthly installments, the effective interest rate is: A) 20 percent. B) 10 percent. C) 15 percent. D) 5 percent. Answer: A

True/False Questions

Type: A E: 543 MI: 299 93. Demand is the active and supply the passive determinant of land rent. Answer: True

Type: A E: 544-545 MI: 300-301 94. Different rents on land reflect differences in the marginal revenue productivity of land. Answer: True

Type: A E: 543 MI: 299 Status: New 95. The free-land era of U.S. history reflected a situation in which the quantity of land available at a zero price exceeded the quantity of land demanded. Answer: True

Type: A E: 543 MI: 299 96. Rent performs an incentive function, but no rationing function. Answer: False

Type: A E: 545 MI: 301 97. The interest rate is the price paid for the use of money. Answer: True

Type: A E: 546 MI: 302 Status: New

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Chapter 29: Rent, Interest, and Profit

98. Unlike most demand curves, the demand curve for loanable funds is upsloping. Answer: False

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Type: A E: 548 MI: 304 Status: New 99. Other things equal, the shorter the loan period and the larger the loan size, the higher is the interest rate charged by the lender. Answer: False

Type: A E: 546 MI: 302 100. The supply of loanable funds is perfectly elastic. Answer: False

Type: D E: 551 MI: 307 101. Economic profits are the salaries received by the hired managers of business corporations. Answer: False

Type: A E: 551 MI: 307 102. The basic function of profits and losses is to allocate society's scarce resources to their highest valued uses. Answer: True

Type: F E: 554 MI: 310 103. Broadly defined, labor's share of national income has been remarkably stable since 1900. Answer: True

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