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Unit 7 – Factor Income Determination (i) The Determination of Wage

1. A monopolist’s demand for a factor of production is A. B. C. D. the value of marginal product. marginal value of social product. marginal revenue product. marginal product. (85-14)

2. Which of the following groups would most likely be harmed by a minimum wage law? A. B. C. D. teenagers with low productivities. salesmen who are paid by commission. waiters who are paid mainly by tips. technicians skilled in specialized techniques. (85-28)

3. In the labour market, it is said, a worker is paid a wage equal to the marginal revenue product. Therefore, A. B. C. civil servants in Hong Kong has enjoyed significant increases in real wages during the last decade because of significant increases in their productivities. a businessman earns a windfall profit because he is more productive. in the University of Hong Kong, a professor is paid twice the salary of a lecturer because the professor knows twice as much and is twice as productive. D. None of the above. (86-14)

4. Assume only two inputs are used in agriculture: land and labour. If adding labour to work on a limited area of land were NOT subject to diminishing marginal productivity, A. B. C. D. scarcity would no longer exist. land rents would be zero. wage rates would be zero. people would be infinitely wealthy. (86-26)

5. The more human capital an individual worker brings to the labour market, A. B. the higher will be his real wage. the lower will be his marginal product because he produces more.

C. the more difficult it will be for him to find work because of his exceptional
ability. D. the more hours of labor he will be able to supply. (86-27)

6. The demand curve for labour corresponds to A. B. C. D. the entire marginal revenue product curve. the entire average revenue product curve. the marginal revenue product curve below the maximum of the average revenue product curve. the average revenue product curve below the maximum of the marginal revenue product curve. (8716) 7. Under which of the following situations will the marginal revenue product of a factor of production be smaller than the value of its marginal product?

A.
B. C. D.

When the quantity of the factor employed decreases, the price of the factor falls. When the price of the product falls, the quantity of the product demanded increases. When the quantity of the factor employed increases, the price of the factor rises. The price of the product is fall over time. (88-06)

8. Diminishing returns begin to occur when A. B. C. D. the marginal product begins to rise. the marginal product begins to fall. the average product begins to rise. the average product begins to fall. (89-12)

9. The demand curve for a factor of production is downward sloping because A. B. C. D. the product market is perfectly competitive. the factor market is imperfect. of the law of diminishing marginal returns. the product demand curve is downward sloping. (89-18)

10. Suppose land and labour are the only factors involved in farming. If the use of land for farming is reduced by law, then the marginal product of land will _____ and that of labour will _____.

A. B. C. D.

rise, rise fall, fall rise, fall fall, rise (90-09)

11. Workers in Hong Kong earn higher wages than those in the Philippines because

A.
B. C. D.

there is a smaller labour supply in Hong Kong. the labour unions in Hong Kong are stronger. the workers in Hong Kong are more productive than those in the Philippines. the living standard in Hong Kong is higher. (91-12)

12. If all firms in an industry are price takers in the market for factor A, then A. B. C. D. changes in industry output will not affect the price of factor A. the marginal product of the last unit of factor A will be the same in all firms. the marginal cost of factor A to firms will be higher than the price of factor A. the demand curve for factor A is horizontal. (91-13)

13. God may have started out to create all men equal, but our parents intervened. Natural differences in abilities, attributes and tastes go far to explain wage differences. Economics tells us that A. B. C. D. the government should therefore set things right, and a socialist state is therefore preferable. the best condition is from whom according to ability and to whom according to needs. with equal education, people will have equal ability. with private property rights, the more productive your labour and the greater the demand for your services relative to its supply, the higher your wage rate. (91-24)

14. Assume leisure is a normal good. If the income effect of a wage increase is greater than the substitution effect, A. B. C. D. the supply curve of labour will be positively sloped. the supply curve of labour will be negatively sloped. the demand curve of labor will shift leftward. the demand curve of labour will be negatively sloped. 16) 15. A monopsonist will pay a wage rate (92-

A. B. C. D.

lower than the marginal factor cost. higher than the marginal factor cost. equal to the marginal factor cost. lower than the average factor cost. (92-18)

16. Under which of the following situations will the marginal revenue product of a factor of production be smaller than the value of its marginal product? A. B. C. D. When the quantity of the factor employed decreases, the price of the factor falls. When the quantity of the factor employed decreases, the price of the factor rises. When the product demand curve facing the producer is downward sloping. When the price of the product is rising over time. (93-06)

17. The more human capital an individual worker brings to the labour market,

A.
B. C. D.

the higher will be his marginal product. the easier it will be for him to find work. the more difficult it will be for him to find work. the more hours of labour he will be willing to supply. (93-26)

18. An employer observes that when one employee is sick (and does not come to work), the value of output falls by $500 per day. If two workers are sick, the value of output falls by $1 200 and when three workers are sick the value of output falls by $2 100. Suppose the wage rate is $750 per man-day, the employer should A. B. C. D. keep the same number of workers. fire one worker. fire two workers. fire three workers. (93-30)

19. When firm is a price-taker in the product market, its demand curve of a factor input is A. B. C. the upward sloping portion of its value of marginal product curve. its marginal product curve. the portion of its value of marginal product curve below its average revenue

product curve. D. the downward sloping portion of its value of marginal product curve. (94-21) 20. An individual’s labour supply curve may be backward-bending because A. B. the substitution effect between work and leisure is smaller than the income effect when the wage increases. the substitution effect between work and leisure is greater than the income effect when the wage increases.

C. the worker’s preference for leisure has decreased.
D. the opportunity cost of leisure increases when the wage increases. (94-22) 21. If Hong Kong’s construction industry is free to import workers from China, it will A. B. C. D. lower the average product labour in the construction industry. increase the total product in the construction industry. lower the marginal cost of production in the construction industry. All of the above. (95-11)

22. Assume that leisure is a normal good. Which of the following is implied by an upward sloping labour supply curve? A. B. C. D. Leisure and income are substitutes. The income effect of a wage increase is smaller than its substitution effect. There are labourers who may receive an economic rent. All of the above. (95-26)

23. In a competitive labour market, two industries require the same type of labour. Suppose the marginal productivity of labour in Industry A is higher than that in Industry B. In the absence of transaction costs, which of the following statements is correct? A. B. C. If labourers are switched from Industry B to Industry A, then the value of the total output of the industries will increase. Employers in Industry A will lay off some workers who will then be employed in Industry B. The labour demand curve for industry A will shift upward and that for

Output will increase at a decreasing rate. Thus. C. A. the marginal productivity theory is not useful because in the real world marginal products are not measured. According to the marginal productivity theory. In a competitive market. (96-26) 25. when all inputs except one increase. none of the above is correct. only inferior land will be cultivated. all usable land will be cultivated. 26. Output will increase at a decreasing rate. . in the University of Hong Kong. B. Output will increase at a decreasing rate. B. when one input increases and another input stays constant. the observed wage rates of men are generally higher than those of women. Output will increase at a decreasing rate. marginal cost curves will not be rising. C. The law of diminishing returns means the following EXCEPT: A. This implies A. (9726) 27. The marginal productivity theory does not apply in some property rights arrangements or in the absence of a free market. D. D. B. when all inputs increase at declining proportions. a professor earns twice the salary of a lecturer because the professor is twice as productive. more men will be employed. medical interns (young doctors under training) earn very little because their marginal products are very low. (96-03) 24. (97-24) B. a worker is paid a wage rate equal to his marginal product. The labour demand curve for Industry A will shift downward and that for Industry B will shift upward. C. A. D. more women will be employed. when all inputs increase together. D.industry B will shift downward. product price will be zero. If the law of diminishing returns does not hold.

the marginal productivity of men is generally higher than that of women. D. C. the demand curve of the product is horizontal. rent will increase indefinitely.. B. All of the above. the marginal product of labour in the garment industry will decrease. (98-30) 30. 11) 32. None of the above. the marginal product of land used in farming will increase. C. increases in the labour-capital ratio will result in decreases in the marginal productivity of labour. A. the short-run average cost curve will not be upward sloping. A. output will increase indefinitely. C.. an increase a decrease . (99-09) 31..C. If the law of diminishing returns does NOT hold. the marginal product of land used for garment making will increase. a decrease (98-05) 29. the wage rate received by a worker depends (99- .. D. D. In a competitive labour market. B. a decrease a decrease . farming and garment-making. the marginal product of labour in farming will increase. the firm is a price searcher. D. The demand curve of labour is downward sloping because A. Suppose labour is mobile between a country’s two competitive industries. C. A.. The amount of land used in farming is fixed. B. D.. an increase . B. (98-04) 28. All of the above. If a sales tax is imposed on garment products. An effective wage floor imposed on imported workers by the government will lead to _____ in marginal productivity and _____ in the average productivity of imported workers. an increase an increase ...

(99-26) 33. (02-04) 35. Both wage and rent cannot be determined. rent cannot be determined. a teacher with 15 year’s experience is paid a salary double that of a teacher with only 5 year’s experience. One flower shop makes money and stays in business. C. will not be affected if the quantity of other factors employed changes. B. In a government-regulated school. B. wage cannot be determined. . a shop may stay in business though losing money. C. Both shops will stay in business indefinitely. All of the above. The demand curve of labour A. The owner of the shop that is losing money is irrational. C. (03-04) 36. the market demand for the product he produces. D. is the downward sloping portion of the marginal revenue product curve below the average revenue product curve. The behaviour of shop owners is unpredictable. D. D. will be horizontal if the producer faces a horizontal demand curve of his product. (02-03) 34. C. The shop owner who is making money is more rational than the shop owner who is losing money. A. that is. B. Both wage and rent can still be determined. The marginal revenue product of the more experience teacher is higher than that of the less experienced teacher by an amount that is _____ the marginal revenue product of the less experienced teacher.on A. his marginal productivity. If the law of diminishing returns does not hold. B. another flower shop loses money and also stays in business. D. they have no plan to close down. All of the above. A. When non-pecuniary gains exist. the alternative offers he receives.

The marginal productivities of both land and labour are higher in industrial usage than in agricultural usage. horizontal. C. D. B. C. The observed pricing practice is inconsistent with the theory that workers are paid according to their marginal products. (03-14) 37. downward sloping. Which of the following statements is correct? A. upward sloping. The observed piece rates would be inconsistent with the theory that machine rents are paid according to the marginal products of the machines. (03-22) 38. All workers use the same machines. The marginal productivity of labour is lower in agricultural usage than in industrial usage. The factor demand curve of a price-taking firm is A. (05-12) . D. A factory. equal to greater than smaller than There is not enough information to tell. D. In China. D.A. B. therefore it would be inconsistent with the postulate of wealth maximization. C. using valuable machines. the rental return of land designated for industrial usage is several times higher than that of land designated for agricultural usage. Without paying different piece rates the rents of the same machines will not be equal. B. (04-30) 39. Assume both land and labour are homogeneous so that both could be readily employed in either industry or agriculture. Which of the following statements about China is correct? A. B. The observation is inconsistent with the theory that the marginal products of different workers will be equated. first upward sloping and then downward sloping. C. The marginal productivity of land is higher in industrial usage than in agricultural usage. The marginal productivity of labour is higher in agricultural usage than in industrial usage. pays higher piece rates for workers who produce more pieces than other workers over the same period of time.

all workers would participate in farming. The law of diminishing marginal productivity is A. (06-14) D. in principle not observable. the highest denomination of currency notes in Renminbi (RMB) 100. a law of empirical regularity. D. one could add successive fertilizer and labour to produce enough wheat to feed the world. B. 7 In the 14th century. the highest denomination of a RMB bill is RMB 100. itself not testable. customers in mainland China do not use credit cards. with a constant wage level. All of the above. When a customer asks a waitress for the invoice after dinner. C. C. with a small wheat farm. the other containing the exact change – just in case the customer does not pay the exact change – just in case the customer does not pay the exact amount. A. (0515) 41. 42. D.40. In mainland China. labour costs in mainland China are lower than elsewhere. the marginal productivity theory will not be affected. All of the above. (07-13) MC Answers on The Determination of Wage C C D A A B D D D D A C B B B C A A D C A C C A D B B A C B B C A B C C C A C A B A The Determination of Wage 1990 Q. restaurant customers in mainland China do not give tips (gratuity). . B. If the law of diminishing marginal productivity does NOT hold. This practice saves servicing cost because A. C. the waitress returns with two folders: one containing the invoice. Most restaurants there adopt the following practice. the Black Death (Bubonic Plague) killed a large number of the population of England (possibly 1/3) within three years. B.

there were indications of a rise in the general standard living. which includes rent. and yet their general living standard today is also far higher. With a decline in labour supply. Hence. knowledge and technical know-how were not popularly used in the 14th century as compared to today. with the improvement of the economic system as the result of widespread introduction of private property rights and the growing specialization of production through international trade.) (8 marks) Given only two factors of production. holding land constant. depending on the elasticity of the MPL. land and labour. results in a rise in real wage from W1 to W2. How can you reconcile this with (a) and (b) above? (9 marks) The presence of other factors of production. this fall in rents will not likely bring down the per capita income. the productivity of labour today is much higher than that of the 14th century. (8 marks) To measure the general standard of living. the total wage may rise or fall. which is equal to the average product of labour. (c) The population density in England today is far higher than that in the 14th century. (Note that production of the time was largely confined to the use of land and labour. such as human capital. Is this consistent with economic theory? Explain with the aid of a diagram. Moreover. with capital accumulation. the above diagram shows the marginal product of labour. the average product of labour (APL). Is this consistent with economic theory? Explain in terms if an aggregate marginal productivity schedule for labour. However. the .(a) It was allegedly observed that in the ensuing years there was a strong tendency for real wages to rise and land rents to fall. A decline in population. and rise from A1 to A2. shift the labour supply from S1 to S2. However. (b) It was also allegedly observed that amidst the evidence of economic decline (abandonment of marginal lands. the rents receives by the landlords would necessarily fall. there would be a rise in general standard of living. we can simply look at the per capita income of people. in the above diagram. Besides. reduction in trade).

5 What will the price of land be if the law of diminishing marginal productivity does not hold? Explain. if diminishing marginal productivity holds. when more and more of a variable factor is being continuously added to a fixed factor. Hence. In this case the inferior land will be cultivated. this means that a tiny piece of land can produce all the food to feed the world. According to this law. i.. With one tiny piece capable of producing all lands combined could. 1991 Q. the marginal products of farmers in the superior land and inferior land will be the same. If diminishing marginal productivity does not hold.e. the price of land would be driven down to nearly zero under competition. all land owners will compete for labour services. (8 marks) Briefly speaking. Why do farmers cultivate both superior and inferior land. Hence.marginal productivity of labour and their general living standard today become much higher than before. . At some point. why do they not cultivate only superior land? (10 marks) This can be explained by the law of diminishing marginal productivity. in equilibrium. the price of land is the same as land rent. Since there are actually a lot more lands than just one tiny piece. 5 Agricultural land has different levels of fertility. given the same non-land inputs their productivities are not the same. this marginal product using the superior land will fall below that of the inferior land. 1995 Q. the marginal product of the variable factor will eventually diminish. all the land owners will try to sell their land on the market but the demand for land is very small. the amount of land rent will be equal to the total product less the income to labour. To compete for labour services. Hence. i.e. With land being fixed and labour the only variable factor. land owners must pay to each unit of labour service according to its marginal product. the marginal product of farmers will fall. with an increasing quantity of farmers working on a superior land.

This implies the validity of the law. the relationship between price and quantity demanded is asserted to exist as long as it is not being refuted. the marginal output will eventually diminishes. but a statement of fact. An assertion is an entity which can neither be derived nor proved. In this case the total wage payment will be equal to total revenue product and there will be no residual income for land.g. it is a statement of fact instead of a postulate or assertion. A postulate is an assumption stating the characteristics. we can observe that only an infinitely small piece of land will be cultivated as marginal product will rise indefinitely by adding labour continuously. So. consumers will be willing to buy more. Hence. 1999 Q. e. in real world observation we can see that both fertile and infertile will be cultivated. the postulate of utility maximization. . to conclude. in order to employ an additional unit of labour.g. ceteris paribus. the wage paid will be equal to the marginal revenue product of corresponding unit of labour employed. properties. e. Since marginal revenue product is higher than average revenue product. However.Another explanation for zero land rent is that since marginal productivity of labour is increasing. it is impossible for the employer to raise the wages of the previous unit. vice versa. However. higher wage has to be offered. the law of diminishing marginal productivity is an empirical law based on observation that means it is induced from real world observation. If the law of diminishing marginal productivity does not holds. since the law is the result of generalization from factual observations. behaviour or relationship of different items defined. 5 The law of diminishing marginal productivity (diminishing returns) is neither a postulate nor an assertion. the Law of Demand which states that when price of good falls. Do you agree? (7 marks) The law of diminishing marginal productivity states that when more and more of a variable factor is continuously added to a fixed factor. Since willingness is not observable.

in order to employ an additional unit of labour. Hence. solely adding labour to a piece of land will eventually lead to a fall in marginal product as well as total product. Thus landlords will have to compete with others for the user of their land. the marginal output of labour will eventually diminishes and the marginal product curve of labour will slope downwards. if the law of diminishing returns does not hold. the rental value of agricultural land. labour.e.2000 Q. only a tiny.e. (a) How much land will be used for farming? marks) The law of diminishing marginal productivity states that when more and more of a variable factor i. the amount of land available is much more than the amount of land needed for farming. so that the marginal product curve of labour is upward sloping. However. Hence. (b) Can we determine the rental value of agricultural land? (5 marks) In market economy. As only a small piece of land will be used. if the above law does not hold so that the product curve of labour is upward rising. Suppose the law of diminishing returns does not hold. This means that by cultivating only a small piece of land. labour and land. land. the wage paid will be equal to the marginal revenue product of corresponding unit of labour employed. is continuously added to a fixed factor i. 5 Consider agricultural production which requires only two inputs. Like the price of other goods. Since marginal revenue product is higher than average revenue product. (3 Another explanation for zero land rent is that since marginal productivity of labour is increasing. it is impossible for the employer to raise the wages of the previous unit. higher wage has to be offered. or infinitely small. the marginal product of labour will keep on increasing with the amount of labour. Eventually the relatively abundant supply of agricultural land will tend to drive the market rent to zero. . the price of a good is determined by the interaction of demand and supply. Hence. In this case the total wage payment will be equal to total revenue product and there will be no residual income for land. output can be increased indefinitely and is sufficient to feed the whole world. piece of land will be used for farming.

the increase of workers can give rise to better division of labour which enables the fixed factor. 2002 Q. the marginal output of labour will eventually diminishes. land. i. is continuously added to a fixed factor i. An important point we must note is that the law states that marginal output will eventually diminish when more and more variable factors is being employed. the amount of fixed factor becomes insufficient and over-utilized. However.e. before diminishing marginal productivity sets in.2001 Q. if we observe that when two persons work together on a given piece of land and the output is more than double that of one person working singly on the same piece of land. This explains the increase in marginal output. helping each other. when more and more workers are employed. Eventually the percentage increase in output become smaller than the percentage increase in workers employed and diminishing marginal productivity results.e. to conclude. it does not imply that this is inconsistent with the law of diminishing marginal productivity.e. Is this consistent with the law of diminishing marginal productivity? (6 marks) The law of diminishing marginal productivity or the law of variable proportions states that when more and more of a variable factor i. the marginal output may be increasing with the increase of variable factors. This may be due to the fact that in the initial stage. From the above information. the output may be more than double that of one person working singly on the same piece of land. However. Hence. labour. So. the above observation is consistent with the law of diminishing marginal productivity. However. land. when two persons work together on a given piece of land. 5 In agriculture. to be better utilized. this implies that the marginal output of the additional worker is increasing. 2 The upward sloping supply curve of a firm is always the result . the percentage increase in outputs is greater than the percentage increase in workers employed.

. the marginal output of labour will eventually diminishes. As factor prices are kept constant.of diminishing marginal productivity. With the increase in some factors while others are fixed.e. it shows the wealth-maximizing output at various prices. Economic rent A. The supply curve of a firm shows the quantities it is willing to supply at various prices. a payment in excess of cost. Since it is derived from its MC curve. i. I agree that the upward sloping supply curve of a firm is always the result of diminishing marginal productivity. C. (8 marks) The law of diminishing marginal productivity states that when more and more of a variable factor i. is continuously added to a fixed factor i. the wage of each factor employed is the same. Do you agree? Explain. a profit obtained without risk. is income earned by the owner of land. Hence. the supply curve is in fact the rising portion of its MC curve above AVC curve. With factor prices remaining constant. D. including workers. the increase in output can only be achieved by employing more factor inputs. (88-21) 2. Economic rent is A.END - (ii) The Determination of Rent 1. the marginal output of variable factors will eventually diminish. the MC curve of the firm will become upward sloping. the marginal cost of producing of an extra unit will become higher than the previous units. . a payment which does not affect the availability of a good. land. MC = MR. B. when marginal output diminishes. a payment necessary to keep a resource at its present use. In short run.e. So. labour. with some factors being fixed.e.

Leung and Miss Tang are equally skilled at their jobs as teachers. a payment to keep the factor input in its current use. a part of cost if the outright sale of the business is an option. D. Mr. C. D. Rent is payment for land but cost is payment for any factor of production the difference total revenue and total cost. both existing and new. Suppose the alternative earnings of all workers. Rent is windfall but cost is expected. a payment to the owner of a fixed factor. (98-27) 7. their productive capacities in everything else are also similar except Miss Tang has more entrepreneurial talent. Miss Tang has a lower economic rent in teaching. a payment which is necessary to keep a factor in its current use. B. None of the above. C. and suppose new workers in that trade accepts a 15% wage cut. If both of them have the same salary as teachers. in a particular trade are identical and constant. (93-04) 4. B. a payment to a factor above the cost of production. Economic rent is A. C. will be eliminated by competition. C. C. Which of the following correctly shows the difference between rent and cost? A. may exist in any economic resource. D. an income to the owner of a natural resource. is a part of profit. Leung has a lower economic rent in teaching. then A. Mr. D. B. D. 14) 5. Which of the following statements about workers .B. (94- cost does. A change in rent does not affect resource allocation. whereas a change in Rent is not transferable but cost is. their economic rent as teacher is the same. other than land. (95-05) 6. B. (90-04) 3. Economic rent is A. part of the cost if the option of outright sale is included.

C. (05-23) 10. B.in that trade is correct? A. None of the above. Economic rent is A. MC Answers on The Determination of Rent A B B B B C The Determination of Rent 2003 Q. A. the owner is earning zero income. Which of the following statements about rent and cost is correct? A. A change in cost will affect resource use but a change in rent will not affect resource use in all dimensions. D. he still stays in business. C. D. D. The cost of quitting the job would remain unchanged for the existing workers. D. (00-24) 8. Rent can be capitalized but cost cannot.e. not a cost. All of the above. B. the owner will be making a profit. the owner is earning a rent. a profit. Rent is a part of cost but cost is not necessarily rent. B. 2 What is rent? (i. B. a payment necessary to keep a factor in its present use. When this flower shop breaks even in terms of money. Both existing and new workers would definitely earn economic rents. Cost is relevant to decision making but rent is not. (06-05) C. A flower shop owner loves flowers so much that even when he loses money in the business. C. (02-29) 9. The transfer earnings of the existing workers would decrease by 15%. economic rent)? Is rent a cost? Explain. a payment which does not affect the current availability of a good. (6 marks) C B A B .

paying less effort to do the job is an opportunity forgone and not paying less effort is a cost. It is reported that among all the people who go deer hunting. It is important to note the phrase a particular dimension because with a price change or an income change some other dimensions may change. For example. 2004 Q. and such income is known as rent. one may begin to shirk but stay in the job. after a salary cut. but the administrative officer remains as an administrative officers. In the administrative officer example. When the salary is high (before the salary cut). shirking is an opportunity forgone. before the salary is reduced. In this case. Rent is a cost because there is always an opportunity foregone. That is. and rent only applies to that dimension where no change occurs. while the remaining 90 per cent or more of them (the inferior hunters) get less than 10 per cent. less than 10 per cent of them (the superior hunters) get more than 90 per cent of the hunted deer. Assume for this question that all people who go deer hunting have the same time cost and that they enjoy hunting equally. (a) What would you call that part of hunting income a superior hunter earns over and above that of an inferior one? Why? (4 marks) . hence with the respect to supply of administrative offices the cut in salary is rent.Rent is that part of income a change of which will not affect quantity supplied of a resource in a particular direction or dimension. not least with an outright transfer of ownership as an opportunity. 7 Many people go deer hunting. An alternative answer can be that: When we have production which involves a fixed factor and a variable factor. rent is cost of staying in the business as there is a forgone opportunity of an outright transfer of the ownership. the availability or the supply of a good or a factor of production will not change in a particular dimension as result of a price change or a change in income to the seller of the good or factor owner. or each of them get hardly any deer. For example. not shirking is a cost. the return above the variable cost is rent to the fixed factor. a salary cut for an administrative officer may induce him to do some administrative work with less effort (hence with respect to effort change there is no rent).

2005 Q . an increase in monopoly in monopoly power as a result of patent protection. Profits arise as a result of A. if this law does not hold the price of land cannot be determined. We may say rent is a part of cost. C. output will rise at a decreasing rate. On the other hand. and this is the reason why the concept of rent is introduced in economics.END - (iii) Profit 1. and likewise the price of other inputs cannot be determined. . a superior hunter would still go hunting as his time cost is no more than that of an inferior hunter.4 Rent is cost. one may keep adding fertilizers to a small plot of land to grow enough food to feed the world. the rent captured by a superior hunter is an income that would not be competed away. producers having usually good foresight.Rent. B. It is called rent because even if this part of income does not exist. If this law does not hold. 2009 Q. In other words. an unanticipated increase in demand.2 What is the law of diminishing return? Why is this law essential in the determination of rents and wage? The law of diminishing returns is the same as the law of diminishing marginal productivity. (8 marks) Rent is a cost when we consider cost is the highest-valued option forgone. . Do you agree? Explain. cost is not necessarily rent in that a change in rent will not change supply or alter behaviour in a certain dimension. but if we are only concerned with changing behaviour. including the option of selling out a business. and at some point the marginal product will become zero and then negative. but cost is not necessarily rent. Therefore. there is no rent component in cost. which states that when one factor input increases while other factor inputs are held constant.

Profit occurs when A. there is no such thing as profit. (95-12) interest. C. there is no such thing as profit. D. A monopolist will earn a higher profit than a competitor. profit arises only if it is unanticipated. D. in competitive equilibrium. in economics. an owner of a resource whose ability is superior. Which of the following is true of profit? A. total revenue exceeds total cost of production. C. The statement that a businessman maximizes profit is troublesome because A. profit does not exist in an economy without free markets. a producer whose marginal cost is above the average cost. a businessman may be more concerned with reputation than profit. profit will be driven down to zero. (89- 5. B. Profit is an unanticipated gain in wealth. Profits are earned by A. profit arises only if it is unanticipated. . an anticipated fall in interest rates. B. D. (85-24) 2. B. 11) in economics. C. (90-05) profit. B. The tax base for the Hong Kong government’s profits tax is what we mean by Profit is interest payment on capital. total net income unexpectedly increases at a rate greater than the rate of All of the above. B. D. (88-05) 4. 6. D. an owner of a resource the value of which has increased unexpectedly. C. (87-04) 3. C. profit will not persist under competition.D. a monopolist who sets a price above the marginal cost. total revenue increases faster than total production cost. Profit cannot be used to predict behaviour because A.

After SARS in 2003 and the introduction of the Individual Visit Scheme. Mrs. Wong had bought a solar heater and has saved some electricity cost. C. it is totally unanticipated. C. not anticipated and therefore cannot be discounted. D. Profit is unexpected but rent is expected. Those property owners who choose not to sell to realize a gain have no profit. D. All property owners enjoying this price are making profit. with the property value rising about 40 per cent from the SARS period. Mrs. There are only capital gains and losses but no profits. Which of the following about profit and rent is correct? A. B. (95-13) 8. Profit will not persist but rent will. Wong has a profit if the interest rate rises unexpectedly. All of the above. C. B. Windfall profit is irrelevant to decision making because A. D. B. Wong has a profit if the electricity price is increased unexpectedly. it is a matter of luck. Those property owners who purchased property at higher prices before SARS are not making profits. A. 11) (04- 11. Mrs. Wong has a profit if the cost of operating the solar heater is increased unexpectedly. Mrs. it cannot be measured. B. (96-11) 9. Mrs. Profit is A. D. Which of the following is correct? A. the housing market in Hong Kong has unexpectedly soared. the same as rent. D. Wong cannot earn a profit from her purchase of the solar heater. what individuals seek to maximize. B. a part of cost. Profit cannot be capitalized but rent can be. there is a chance of suffering loss. C. C.7. (97-21) 10. (05- .

but a reduction in rent will not affect the resources available. they will not be considered in the process of decision-making and so they are not part of costs. he incurs a cost in obtaining rent for not selling the resource ownership to others. Rents are expected returns. However. may exist in a perfectly certain world. B. They are not expected to last under competition. C. is an income that cannot be discounted. Owing to unexpected increase in demand for his product.24) 12. (However. the earnings of the monopolist may be higher than the amount expected.e. (10 marks) Profits are unexpected returns to investments at a rate over and above the rate of interest. Profits cannot be so discounted. is a part of rent. since profits are totally unexpected. he is earning an amount which is over and above the amount he can earned in his highest-valued alternative use. An example of rent is that a monopolist protected by the government is earning rent when his income is in excess of cost. i. Rents. If this is . Profit A. therefore. the resource owner can also realized the same amount of return of rent. (07-05) MC Answers on Profit A B B A A A B B B A B B Profit 1991 Q. Moreover. D. rent can be discounted and capitalized in decision-making. is a part of cost.) Since rents are expected and profits are not. are returns over and above the opportunity costs of the resources employed in alternative uses. 2 What is the main difference between profit and rents? Give two examples (one example each) to illustrate this difference. since with a transfer in ownership. we should note that rent is not the returns over the alternative of a transfer in ownership.

i. it is defined as a return over and above the amount which is necessary to keep the resource in its present use. it is the unexpected return to capital at a rate higher than the rate of interest. In other words. For rent. it is defined as a return over and above the amount which is necessary to keep the resource in its present use. profit is an ex-post concept while rent is an ex-ante concept. profit is not part of cost in the decision-making process while rent forms part of cost if the option of outright sale is included. For example. then a profit of $5 000 will exist. If the $5 000 is expected to persist in future. the expected rate of return. an investment made by a firm worth $100 000 with an expected return of 10% means income of $10 000 per time period. Moreover. profit is defined as an unexpected increase in wealth. However. since rent is expected while the profit is unexpected. it is the amount over and above the highest alternative use of the resources. profit is defined as an unexpected increase in wealth. 4 Is rent part of cost? Is profit part of cost? Explain. it is the unexpected return to capital at a rate higher than the rate of interest. (8 marks) In Economics. rent can be use to predict behaviour as ‘rent maximization’ is a real possibility.e.the case. . the earnings in excess of the expected amount is an example of profit. For rent. If there is a sudden change in demand which gives rise to a realized return of 15% to this investment. i. rent can be capitalized while profit cannot. In other words. To conclude. In other words.e. profit cannot be used to predict behaviour as it is impossible for an individual to maximize what is unexpected. 1995 Q. Finally. the expected rate of return. such amount will become rent. Besides. 1993 Q. it is the amount over and above the highest alternative use of the resources. In other words. 2 What is profit? What is the difference between profit and rent? (8 marks) In Economics.

~~ 2005 Q. profit cannot be used to predict behaviour as it is impossible for an individual to maximize what is unexpected. If the $5 000 is expected to persist in future. but if we are only concerned with changing behavior. If there is a sudden change in demand which gives rise to a realized return of 15% to this investment. 2006 Q. (8 marks) Rent is that part of income an alternation of which will not affect . To conclude.4 Rent is cost but cost is not necessarily rent . Moreover. However. (8 marks) Rent is a cost when we considered cost is the highest valued option forgone. Besides. do you agree? Explain. an investment made by a firm worth $100 000 with an expected return of 10% means income of $10 000 per time period. rent can be use to predict behaviour as ‘rent maximization’ is a real possibility. That is the value of a resource or a good will be absorbed by the cost incurred under competition for using the resources or for getting the good. or when price is not used as a criterion for allocation. such amount will become rent. On the other hand.1 What is dissipation of rent? Explain how and why this dissipation take place. 2005 Q. (8 marks) When rent of income has no exclusive claimant. competition for resource use or for a good will lead to what has become known as the dissipation of rent. 2 What is the difference between rent and profit? Can they both be capitalized? Explain. rent can be capitalized while profit cannot. and this is the reason why the concept of rent is introduced in economics. there is no rent component in cost. including the option of selling out a business. profit is not part of cost in the decision-making process while rent forms part of cost if the option of outright sale is included. cost isn’t necessarily rent in that a change in rent will not change supply or alter behavior in a certain dimension. Finally. since rent is expected while the profit is unexpected. not by producing something of value to exchange in return. profit is an ex-post concept while rent is an ex-ante concept. then a profit of $5 000 will exist. We may say rent is a part of cost.For example.

3 What is “dissipation of rent ”? Will it occur without competition? Why is it so important for the interpretation of equilibrium in economies? Any scare resource has a rental value. Equilibrium analysis requires that at the margin there is no rent left without exclusive claimants. D. A consumer durable is not a capital good. C.5 What is the relationship between income and wealth? Does wealth exist in a one man economy? Explain. 2008 Q. except labour. Labour is a capital asset because of its future income potential. Profit is windfall. but there is no market. except land and labour. wealth cannot be determined. Wealth is income discounted. Interest is a price. there is income. W=Y/r . that is capable of generating income. Rent can be capitalized because it is anticipated. except untrained labour. an unanticipated return at a rate higher than the rate of interest. where r is the rate of interest. as in a one man economy the rent of any scare resource is fully captured by only one man. 2009 Q. Which of the following statements about capital is correct? A. that analysis must be wrong. normally at a specific margin. However this rental value may not be competed away if that resource is subject to unrestricted common exploitation. profit cannot be capitalized as a windfall it is not anticipated. Dissipation of rent is an important concept in economic analysis because if at the margin there are some rents without exclusive claimants left in the analysis. Without r . (85-15) 2. Hence there is no interest and no rate of interest. B.END (iv) Capital 1. B. which does not exist without any kind of market. Rent dissipation will not occur without competition. as in the case when the cost of use increase when people compete to capture that rent.behaviour. A capital asset is any asset A. . Wealth does not exist in a one man economy. In a one man economy. .

B. D. (94- 19) 3. will not be raised if the present value of the cost of feeding it is higher than the market value of the goose. A goose which lays golden eggs A. other abilities adjusted. Land and labour cannot both be capital assets because they are different in their physical features. C. but money. A horse used for farming is not capital. A residential house is a consumer good and therefore not capital. Which of the following is LEAST likely to have a capital value? A. Which of the following statements about capital is correct? A. This implies A. C. Workers and machines are both capital although they are very different in appearance. good looks are a capital asset. B. The price of a capital good determines the value of its future income. C. A researcher reported that people with good looks receive an income about 5% higher than average workers. the ability to speak Putonghua. None of the above. D. will be worth more when the interest rate rises. C. equipment and money. a duck that does not lay eggs. D. D. Capital refers to A. neither land nor labour. all assets which generate income. land but not labour. is invaluable. should be protected by the government. (96-01) 4. D. B.C. the voice of a professional singer. . B. (97-17) 5. discrimination. (97-29) 6. machinery. a goldmine inaccessible for another thousand years. B. (03-21) 7.

$200 000. there has been technological change in apple farming. 05) (85- 2. B. If an apple today can be exchanged for the right to one and half apples a year from today. All of the above. will . we can infer that A. gross business income is $350 000 a year. $400 000. D. The annual rate of interest is 10%. and the tax is 20% of net income. (86-01) 4. D. B. sell a broken chair to a prospective tenant for approximately A. market preference for apples is shifting. $1 000 000. If the cost of operating a taxi is $200 000 a year. it pays to dress nicely. C. (07-17) MC Answers on Capital A B B B C A D (v) Interest 1. D. C. the government imposes rent controls restricting the annual rent to $20 000. the market value of a taxi licence will be approximately A. D. $1 200 000. Assume the relative prices of all goods are constant. Once rented. the landlord can. $600 000. Suppose the expected market rental annuity of a flat is $60 000 per year. as a condition for occupying the flat. receiving $450 each year. When the interest rate increases from 10% to 15%. the landlord cannot evict a tenant has a right to the tenancy in perpetuity. Assume the annual rate of interest is 12%. the owner of a perpetual bond. (85-19) 3. $2 000 000. If the flat is now vacant. the annual rate of interest is 50%. C. B. an exceptionally good apple harvest is expected for the next year. $40 000.C. $500 000.

A. B. C. Interest is not part of income. (89-20) 9. true because in the loan market. enjoy an increase in wealth of $1 500. The higher the rate of interest. B. suffer a fall in wealth of $1 500. . but the whole of it. How will the price of a durable good change relative to the price of a nondurable good if the interest rate falls? A. B. (87-11) 5. Which of the following statements about interest is FALSE? A. (87-24) 6. but the whole of income. (88-26) 7. Interest will not exist without money. D. Interest is a premium of future over present consumption. The price of the durable good will rise relative to that of the non-durable good. C. suffer a fall in wealth of $2 250. D. we pay interest when we borrow. false because interest is the premium of present over future consumption. B. None of the above. Interest is the price we pay for the earlier availability of goods. Which of the following statements about interest is FALSE? A. Interest is a price. Interest is not part of income. C. Interest is the price of earlier availability. B. This statement is A. The price of the durable good will fall relative to that of the non-durable good. enjoy an increase in wealth of $2 250. true because interest is the premium of present over future money. Interest is a monetary phenomenon because without money there will be no interest. D. Which of the following statements about interest is INCORRECT? A. D. the lower will be the present value of a given income stream. C. false because interest is a payment for liquidity. The relative price will remain unchanged. D. Interest will not exist without money. (89-19) 8. C.

the rate of profit is 0.3. Suppose you are given the following choices of payment methods for purchasing a machine which lasts forever. (91-14) 12. It will increase if the cost of maintaining the machinery falls. B. a fall in the price of longer-life light bulbs relative to shorter-life ones. B. $900 at the end of each year forever. (89-30) 10. A rise in interest rates will result in A. B owns $100 000 worth of short-term bonds. (91-09) 11. C. $3 500 at the end of the next three years. B. Mr. There exists only one interest rate in the market. D. A rise in the interest rate will A. A. (92-13) 14. a rise in the price of longer-life light bulbs relative to shorter-life ones. the rate of interest is 0. a rise in the price of all light bulbs. $6 000 cash now and $5 000 one year from now. D. B. a fall in the price of shorter-life light bulbs only. C. reduce the wealth of both men by the same amount. (91-26) 13. reduce the wealth of both men but Mr.3 bushels of wheat a year from today. If you can exchange 2 bushels of wheat today for the right to receive 2. Which of the following is the lowest price if the annual interest rate is 10%? A. . A owns $100 000 worth of long-term bonds while Mr. It will increase if the rate of interest rises. It will increase if the scarp value is expected to rise. D. It will increase if the annual income generated by the machinery increases. the rate of interest is 0. Interest is the whole of income. B.15. When a man buys a house with his own cash. C.15. Which of the following about the market value of a piece of machinery is FLASE? A. D. Interest is a flow concept. D. A will suffer more. the present cash price of $10 000.3. the interest cost of his house to him is zero. C. the rate of profit is 0.B. C.

then Mr. D. increase by $1 875. Chan owns a taxi licence and drives his own taxi. Mr. Suppose a university student borrows $10 000 which is subject to repayment . If the rate of interest rises significantly. D. true because interest is the premium one pays for the earlier availability of goods. (95-04) 18. the average size of privately farmed fish sold in the market will be larger. decrease by $1 875. D. B. the price of compact discs will rise relative to the price of cassette tapes. increase by $8 333. Suppose the price of a taxi licence is increased by $50 000 due to the government policy to restrict the issue of taxi licenses. people tend to seek the jobs with lower income at the earlier stage of their career. false because money is used in all societies. This statement is A. B but reduce the wealth of Mr. increase the wealth of Mr. the demand for less durable cars will increase while the demand for more durable cars will fall. D. Interest exists even without money. Chan’s wealth will be increased by $500 000. B. (96-02) 19. Mr. Chan’s cost of operation will increase. If the interest rate is 10% and it is assumed that income generated is perpetual. Mr. B. Chan’s will sell his taxi licence. B will suffer more. Mr. reduce the wealth of both men but Mr. decrease by $8 333. C. (93-28) 16. A. C. (93-03) 15. Which of the following is correct? A. true because we pay interest when we borrow. B. A. D. false because interest is a compensation for inflation. If the interest rate decreases from 16% to 10%. C. Chan’s wealth will not be affected as he can earn the same income.C. the present value of a perpetual bond yielding $500 per year will A. C. (94-20) 17.

their stability. Interest is a price for the earlier availability of a good. If the market interest rate during this threeyear period is 10% p. All of the above. while other drivers own their taxis. D. C. D. C. In Hong Kong. C. the cost of the taxi service provided by a taxi owner is usually lower.in 3 years at zero interest rate. the discounted present value of the benefits from borrowing the money is A. The real interest rate will A. This implies that A. (98-11) 21. Given the opportunity to borrow or lend at a constant interest rate. Interest refers to the return to man-made resources and thus it is only a part of income. B. D. the choice among alternative income streams depends on A. D. Interest will not exist without money. the interest rate will be zero. B. their discounted present values. B. Which of the following statements about interest is true? A. some taxi drivers rent taxis form taxi owners. (99-08) 23. $0 $2 487 $3 000 $3 310 (98-03) 20. the preferred present values. there exists a capital market where the market rent of a taxi is capitalized into the price of a taxi and its licence. rise in an economy when a popular religious organization convinces the people that the world will end in a year’s time. the market rent collected by a taxi owner is a monopoly rent. C.. the driver of a taxi will net be able to earn any economic rent. (98-26) 22.a. If there is no inflation. B. .

is a price pays for earlier consumption. B. Interest A. During the past several years. C. D..7 (99-29) 25. If there is no transaction cost interest rate approaches zero. A corporate bond promises to pay $100 interest a year. the number of young men and women in China seeking a college education has sharply increased. It matures in 3 years. must have monetary value. D. C.8 $1 257. rise with an increase in the anticipated rate of inflation. D. inflation has been bought under control. the present value of the bond is: A. This is because A. 24) 27. B. C. is a part of income. $1 032 $1 051. C. in addition to the interest payment. D. interest rate must be negative. (02-02) 26. the Chinese government has a long history of employing scholars. If the market interest rate is 8% p. fall in a newly industrialized economy. A more patient individual is willing to pay a higher interest rate for earlier consumption. Which of the following statements about interest is correct? A. Interest is a premium received for postponing current consumption. If there is deflation.5 $1 093. the job market has turned weak. D. the rate of interest has fallen substantially. B.B. B. 10) (99- 24. C. at which time it pays out its full face value of $1 000 to the bond owner. will not exist if no one borrows or lends. (04-23) (03- . fall in agricultural economy where a typhoon has destroyed most of the crops.a.

B. D. Which of the following explains this? A. Although people in Shenzhen at present have a much lower per capita income than people in Hong Kong. The wine brewer will sell his wine at a later date if A. the former tend to consume a larger fraction of their current incomes than the latter. C. the market interest rate decreases.28. An apple orchard yields apple. B. The value of apples and the value of the apple orchard are not related. The statement is false. the annuity incomes of the Shenzhen people are far higher than their current incomes. the growth rate of the wine’s value begins to fall. land rent is lower. Because of their lower current incomes. None of the above. and the value of the orchard is determined by the value of the apples. the value of the apples will rise. B. D. Shenzhen people are forced to spend a larger fraction. land rent is higher. (05-22) 31. because if the value of the apple orchard rises. The value of the apple orchard determines the value of apples. (04-24) 29. The statement is false. Trees. D. D. The wine grows in value as time goes by. If there is no money the value of the apple orchard cannot be determined. A forest owner will cut the trees earlier if A. Because of Shenzhen’s fast growth. storage cost increases. Interest rates are lower in Shenzhen. Which of the following about the above statement is correct? A. C. the interest rate is stable. (05-21) 30. The value of apples is income and the value of the apple orchard is wealth. the interest rate is lower. one planted. C. will grow to produce valuable wood. B. A wine brewer keeps wine in a barrel to mellow. (05-25) . The tax rate in Shenzhen is higher. C.

C. people produce fewer perishable goods and more durable goods. wealth maximization may not imply cost minimization. C. The net present value of an investment project is the key factor in an investment decision. Which of the following about an investment decision is correct? A. (06-11) 33. D. (06-12) MC Answers on Interest C C B B C D C C A B B D C B B A C B A C A C A C A C D B C C D A (vi) Investment 1. the more reluctant one is to abandon it. (90-27) 2. young people play more and study less. D. C. An increase in interest rates will result in A. (91-03) 3. a banking system. B. All of the above. Investment take place when A. Interest exists in the absence of A. the premium of earlier consumption over later consumption falls. the interest rate falls. B. D. an increase in the price of wine. The cost of an investment project will be lowered if it is completed earlier. The more one has invested in a project. B. companies issue new bonds. money. an increase in investment in human capital. . risks. a fall in the price of long-life light bulbs relative to short-life ones. D. an increase in the price of land. B. People will invest more in human capital if A. Given an investment project. C.32.

C. B. You are investing when you A. Given the opportunity to borrow or lend at a constant interest rate. after two years. Trees are cut down for burning. (98-10) 8. To maximize wealth. consumption cannot exceed income. (93-13) 5. People convert fresh milk into cheese. D. you should sell the wine you store A. the real rate of interest declines. will choose the one which yields the highest present value of net worth. Suppose there are opportunities to borrow or lend at a constant interest rate A. after any number of years. B. B. consumption must equal to income. D. buy shares. B. All of the above. D. (97-30) 7. Assume that there are no storage costs and that the market value of a bottle of wine purchased today at $500 will increase by $50 every year. C. (92-02) 4. will choose the one which can be acquired at the lowest cost. B. C. in a given period of time A. There is not enough information to tell. consumption equals wealth times interest rate.B. Students play less and study more. D. C. . go to bed early tonight. (94-30) 6. consumption may exceed income. take vitamin pills. Which of the following is NOT an investment? A. medical advances have led to an increase in life expectancy. after one year. D. C. All of the above. Mary deposits $1 000 into her account in the bank instead of spending it. Suppose you do not drink wine but are storing wine as an investment. Assume the interest rate is 10% per annum and will remain so forever.

B... $5000 $5000 . D. $ 500 . Your wealth increases by _____. (03-25) 9. D. $ 5000 . $10500 (96-25) 3. and your interest income per year is $12 000. your wealth increases by $100 000. $ 500 .. If both income and interest rate fluctuate over time. an individual sets a target for himself for how much he must invest per period of time. $15000 $5000 . 20) (05- MC Answers on Investment D B D C A D A A B (vii) Wealth and Income 1. Investment decisions are separate from consumption decision if A. Assume a 10% rate of interest per year. your wealth increases by $100 000. your income increases by $12 000.. your income increases by _____ and your maximum possible rate of saving is _____ per year. the government provides interest-free loans to the poor. your income increases by $12 000. is indifferent to any two which yield the same total income.. A... (86-02) 2. will choose the one which has the largest total income. your wealth increases by $100 000. C. and your maximum consumption is $12 000. there is a market in which one may lend or borrow at the market rate of interest... $10500 $5000 . A.. C. an individual is sufficiently rich... and your maximum annual rate of saving is $100 000.C. he could consume all he wants and still have money left to invest. $15000 . Suppose you are given $100 000 by a rich uncle. D. .. your wealth increases by $100 000. D. your income increases by $100 000. $ 5000 . You have an income of $10 000 annually.. your income increases by $12 000. B. Suddenly you receive a gift of $5 000 in cash. and your maximum annual rate of saving is $12 000.. C. At an annual interest rate of 12%. B..

the market rate of interest does not exist. (00-21) 4. if the market rate of interest is zero. D. Given no further information. The developer is not maximizing wealth. sub-letting. Wealth maximization and income maximization are the same A. C. tie-in rentals of premises and furniture. (02-01) 5. D. The cost of land per house in the first phase is far below the second phase. D. D. the postulate of income maximization will be preferred to the postulate of wealth maximization. C. if there is no profit. B. and as such professional calculations indicate the price per house in the second phase should double that of the first phase. C. However. income fluctuates over time. Which of the following is least likely to occur under rent control? A. the land cost of the second phase is six times that of the first phrase. we have no explanation as to why the price of housing in the first phase has to gone up. with the second phase not yet built. its variation will not affect housing supply and therefore the price of housing is insensitive to changing land cost. Wealth cannot be determined if A. D. and under competition the developer cannot sell above the cost he had incurred. B. consumption will necessarily fluctuate over time. (03-03) 6. All of the above. (04-22) 7. interest rate fluctuate over time. B. Which of the following is correct? A. B.A. wealth cannot be determined. C. if we are referring to annuity income. in the absence of a market rate of interest. (05-17) . C. consumption may still be constant over time. the price per house in the first phase remains unchanged. B. more maintenance of the rented premises. corruption. In one housing development in Shanghai. Since the cost of land is all rent.

such as friendship or prestige. Which of the following statements about wealth and income is correct? A. but after graduation his income will rise at a fairly rapid rate for years thereafter. Wealth and Income 1987 Q. D. Without an interest rate. cannot be explained by wealth maximization. (06-13) 9. 10 A student entering the University of Hong Kong will have no income for three years. B. As an alternative. this student could go out to work immediately after matriculation. C. cannot be explained by utility maximization or wealth maximization. B. Interest. will the student always choose the university education? Explain. although his income through time will increase at a slower rate. Choices that have no market price or pecuniary value. Wealth exists even without income. can be explained by wealth maximization with the postulate of substitution. (8 marks) If the interest rate is positive. If resources are not private properties. a student will not choose to enter the . Maximizing wealth is the same as maximizing annuity income. A. Assume wealth maximization is the only objective of the student. wealth is the same as expected income.8. (a) If the total income in life of getting a university education is greater than that of not entering the university. there can be neither wealth nor income. D. (07-11) MC Answers on Wealth and Income D B A C C D A D C Capital. C. Investment. and his initial income will be considerably higher than if he enters the University. must be explained by utility maximization.

As farther incomes are discounted more heavily. If this is the case. (8 marks) The availability of low-interest loans to students will not affect the decision made in (a) since wealth without the university education is still higher at any rate of interest. Hence. the discounted future income of a university graduate will definitely be lower than that of a non-graduate. 6 . if he previously chooses not to enter the university. In this case he will choose to enter the university. will the student ever choose to enter the university? Explain. This is because by considering the lower interest cost. In (b). he will not choose to enter the university. his decision will be the same as before. It is because to maximize wealth. (c)Will your answers in (a) and (b) be different if the university makes available low-interest loans to students? Explain. if the life income of a university graduate is lower than that of a non-graduate. he will not choose to enter to enter the university. If the interest rate is low. However. However. 1989 Q.university. if the interest rate is high. the discounted future income of a university graduate will be higher than that of a non-graduate. (8 marks) Whether he will choose to enter the university still depends on the discounted future income. the interest income foregone for entering the university can be partly compensated by investing the low-interest loan in investment which yields higher rate prevailing in the market. the low-interest loans may encourage him to enter the university. one has to choose the option which provides highest discounted future income. (b) If the total income in life is higher without the university education. if a student initially chooses to enter the university. the discounted future income of a university graduate may be lower than that of a non-graduate. Since the income obtained after attending university education is later than that of a non-graduate. Loans to student are not an alternative to those who can maximize wealth by working earlier. the higher income earned from non-graduate in the early years can be invested to earn a higher interest income.

in the turnover rate of tenants under rent control. (9 marks) The landlord would like to evict the tenants and then reconstruct the building more often. for acquiring the right to lease. which is the constant rate of interest Rm = Rc = R = significantly below Rm (a) Suppose the rent control is expected to last forever. (c) Suppose the law allows the landlord to evict the tenant at will if the former chooses to reconstruct a leased building. (Rm . and Rm > Rc. The turnover rate of tenants under rent control will be lower. This lump-sum in effect is prepaid rent for the future use of a flat so that moving out means the loss of rent paid in advance. The lump-sum or key money would serve as a deterrent to those tenants who want to move out.Rc) / r (b) What would you expect of the change. when a flat was vacant. If rent control is expected to last forever. (8 marks) Tenants would have to pay a lump-sum in addition to monthly rent in order to live in the flats. However. the landlord will charge a prospective tenants lump-sum which adds up to the sum of his loss for all these different time periods i. What would happen to the rate of housing reconstruction of leased buildings under rent control? Explain. as compared to a free-market situation? Explain. For each reconstruction of a leased building. with the controlled rent significantly below the market rent. The lump-sum can be calculated as K = (Rm .Before and after World War II. To recover the losses. be determined in the market? (8 marks) The would-be free-market rent is Rm and the constant controlled rent is Rc.Rc) is the loss per time period. if any. (a) Let K = key money the would-be free-market rent the constant controlled rent. he would only have to pay controlled rent.e. the . the difference between Rm and Rc also last forever. How would the key money. the Hong Kong government imposed rent control on all domestic premises in the city. K. once the tenant moved in. Following this. the landlord could charge a prospective tenant a large lump-sum called key-money.

Capital and wealth may therefore be regarded as the same because they are both future income discounted.’ Is this statement correct? Explain your answer. land and labour are different entities engaged in production. So labour has different characteristics from machines. (10 marks) In Economics. However. the different terms are used only to denote different physical factors of production. then why is ‘capital’ often treated as neither land nor labour? (10 marks) Yes. 4 ‘Capital is the same as wealth. the different productive entities were often treated as conceptually different.e. wealth is the same as the capital as it is the same as the capital value of an asset. if Y0 is income of an infinitesimally short period and therefore approaching zero. wealth is defined as the stream of future income discounted. the market value of a capital asset is equal to the present value of the income stream generated from this asset. . land and labour are all capital. 2 ‘Capital. 1989 Q. then W0 = K0. and as such they are different factors of production.’ Do you agree? Explain. since the value of land and labour rest on their ability to generate income. If your answer is ‘yes’. Capital value = I / r where I is the annual income r is the interest rate Hence.landlord can charge the new tenants the market rent through the key money payment. If income is perpetuity. it is defined as any asset which is able to generate a stream of future income. Before the concept is generalized. 1990 Q. wealth will be equal to W=I/r where W is wealth I is the annual income r is the market interest rate According to the generalized concept of capital. any productive asset that can generate a stream of future income is a capital asset. Thus. in the aspect that labour cannot be stored but service from machinery can. Moreover. say. The rate of reconstruction will tend to rise. If income is perpetuity. and the discounted value of the income stream is its capital value. Today. they can also be defined as capital assets. i.

the consumption of other citizens would fall. very small.1991 Q. Thus. they would consume more than if borrowing was possible. at least in the beginning. therefore driving up the real interest rate. there will be a fall in consumption for the non-miners and a rise in consumption for the miners. California at that time was isolated from the east coast of the United States because the transcontinental railroad was not yet built. because it was the miners who wanted to borrow fro consumption and drove up the interest rate. On the other hand. 7 Gold was found in California in 1848. they would borrow from non-miners to increase their current consumption. (a) What would you expect the effects to be upon the real rate of interest when the gold rush began? Explain. no matter how high the interest rate was. (8 marks) The rise in real interest rate would restrain the consumption of all the people in California. (9 marks) The real interest rate will rise. This is because without a similar expected rise in wealth. It was reported that gold miners thought that they would become very rich in the future. With their relative low actual income they earned. although the actual incomes they earned were. (c)What would the effects upon the interest rate and consumption pattern in California after the transcontinental railroad was built a few years later? Explain. and the famous gold rush was on. as non-miners loaned to miners. gold miners tended to consume more based on their expected wealth increase. (8 . which forced the miners to borrow from the local and small loan markets. a higher real interest rate would encourage consumption. (b) What would the effects of the change in interest rate be upon the consumption behaviour of the gold miners and other citizens in California? Explain. This rise in interest rate was accentuated (intensified) by the lack of a transcontinental railroad. With the expected sharp rise in wealth. However.

e. 1992 Q. interest is also the value at the margin.marks) The interest rate in California would fall as a result of the construction of the transcontinental railroad. it means the earlier availability by itself is worth $10. It is also the average exchange value because under competition every one pays the same price or interest for the privilege of getting the investment good earlier.g. the equilibrium interest rate indicates the average exchange value of earlier consumption with delayed consumption. the east coast. (12 marks) According to the generalized concept of capital. With the fall in interest rate. if the interest under consideration is $10. but when the debt is repaid. every transaction of this sort involves the same price as well as the same average exchange value. interest can also be interpreted as the value of net productivity of investment at the margin. Since market is competitive. If we say that interest is a price. 2 Interest is a price. price is the average exchange value of a good or the value of a good at the margin. he has less consumption. Since it . borrowing. i. For example. if an individual would like to have more consumption earlier. Besides. funds from areas of lower interest rates. 1992 Q. there will be an increase in consumption generally. capital is defined as any asset which is able to generate a stream of future income. 3 Give different types of examples to illustrate the generalized concept of capital. In terms of consumption. it is equal to the price of earlier availability. e. In terms of consumption. would be transferred to California to warn a higher interest rate. Why is it a price? What is it a price of? (12 marks) In Economics. For example. With the railroad. This would drive down the interest rate in California. The lender in this case receives the price or compensation for giving up consumption now for more consumption in future. Moreover. he will pay the price for it. the equilibrium interest rate measures the value of earlier consumption at the margin.

the following discounting process is needed: . 1 Explain the relationship between income and interest. the interest income is defined as the maximum amount one can consume per period of time without affecting one’s wealth. wealth. to determine the value of the total stock of assets.e. even untrained labour is also a capital as it can be used to generate a stream of future income overtime. So. (8 marks) Since W = I / r. all factor income is interest. 1993 Q. i. since all factors can be defined as capital. To discount the future income. they can also be defined as capital. we mean the future income discounted. Hence. Thus it is able to generate a stream of future income.’ 1994 Q. a factory or a piece of machinery. say. 3 What is wealth? Why does the concept of wealth become ambiguous if there is no market? (8 marks) By wealth. According to this definition. consists of everything one possesses which can generate a stream of future income. as interest is the return to capital. or capital stock. to conclude. Hence. A piece of land can be used to grow. even land and labour (human capital) can also be defined as capital in this sense. not part of it. As one’s wealth. As education and training for workers can increase their income generating ability which lasts for a period of time. we have to bear in mind that ‘Interest is the whole of income. a piece of land and labour are all capital. either human or non-human. we have to make use of the market interest rate. the capital value of an asset is equal to its discounted present value. In fact.is able to generate future income. The returns to land and labour also reflect their productivities and the price of these human as well as noon-human capitals is equal to the discounted value of the future income generated. A factory is capital because it is durable and is used to generate a stream of future income. vegetable for a long period of time.

3 Interest is not part of income. (8 . maximizing total income through time. and so is maximizing annual income. Then future income cannot be discounted.W=I/r where I is the annual income r is the market interest rate Without a market. maximizing wealth is consistent with maximizing consumption through time. Then it will be unclear what wealth is and the concept of wealth becomes ambiguous. The value of wealth can be derived as follows: W=I/r where I is the annual income r is the market interest rate However. or maximizing income of a particular period. income maximization is not useful in interpreting behaviour. 2 What is the difference between wealth maximization and income maximization? Compare the two criteria of maximization in terms of their usefulness in interpreting behaviour. (8 marks) As wealth is the discounted future income flow from assets. it is not the same as maximizing income that fluctuates. More specifically. 1995 Q. income itself may fluctuate from time to time. there will be no market interest rate. income is ambiguous. maximizing wealth implies maximizing the discounted future income flow from assets. 1995 Q. However. Thus. since it is not the same as annual income. Do you agree? Explain. maximizing income is not useful in interpreting behaviour because we do not know income of which particular period we should use. Hence. Only if there is no market and market interest rate does not exists will maximizing income become the only choice as wealth cannot be calculated. Though maximizing wealth implies maximizing annual income. but the whole of income. is not the same as maximizing the consumption stream.

arguments on things like the honesty of his reported sales can be prevented. or capital stock. the cost to keep an eye on book sales in order to avoid being cheated by the publisher is saved. So. (15 marks) In the event of perfect certainty of the future income stream. consists of everything one possesses which can generate a stream of future income. Hence. In the event of certainty of the future quantity of book sales but uncertainty about the future price of the book. since it incurs the lowest transaction costs among all payment systems. (b) certainty of the future quantity of book sales but uncertainty about the future price of the book. to conclude. As one’s wealth. 7 The authors of books may be paid by the publisher in one of three ways: (1) a royalty based on a percentage of the gross sale of books. even land and labour (human capital) can also be defined as capital in this sense. and (3) a lump-sum payment to the author on a once-and-for-all basis. the interest income is defined as the maximum amount one can consume per period of time without affecting one’s wealth. as interest is the return to capital. To the publisher. we have to bear in mind that ‘Interest is the whole of income. all factor income is interest. since all factors can be defined as capital. (2) a fixed unit royalty for each book sale. and (c) certainty of future price but uncertainty about the future quantity of sale? Explain. not part of it. the percentage royalty payment would most likely be chosen. The returns to land and labour also reflect their productivities and the price of these human as well as noon-human capitals is equal to the discounted value of the future income generated. the lumpsum payment would most likely be chosen. also. the onceand-for-all property allows him to save costs of further negotiations. Which would the likely form of payment be in the event of (a) perfect certainty of the future income of book sale.’ 1995 Q.marks) Since W = I / r. since risk burdens can be shared by both parties. To the authors. . either human or non-human.

under a fixed unit royalty and a lumpsum payment. with the future quantity of sale being uncertain. the risk burden is shifted on the publisher. Since wealth. In the event of certainty of future price but uncertainty about the future quantity of sale. income. On the other hand. rent and utility are all expected magnitudes. since it can spread risk burdens and at the same time bears the lowest transaction costs. e.g. the cost of preventing being cheated the price is greater than when the fixed unit royalty payment is adopted. maximizing rent. For income. Fourthly. Under a lump-sum payment. In terms of economic explanation. Thus. measurement cost and pricing cost. 4 Economists may speak of maximizing wealth. in order to show that an individual’s behaviour is heading towards maximization. To say an individual is a maximizer. profit is an unexpected increase in wealth. it is the flow of potential consumption without reducing one’s wealth. bearing the properties of risk-spreading and minimal transaction costs. maximizing income. we are concerned with an expected target to maximize. Being a riskadverser. the risk burden is shifted on the publisher. the publisher will try to shoulder as little risk as possible. information cost of searching the future market price. . While rent is the expected income of a resource owner in excess of the amount to keep the resource in its present use. wealth is the discounted value of net income flow over time. to the authors. The percentage royalty payment enables the reduction and sharing of risk and the transaction costs between both parties. Lastly.If the future price is uncertain. which of the above is the worst choice? Explain your answer. and last but not the least. Thus. the fixed unit royalty payment would be chosen. (8 marks) In economics. maximizing profit. while the percentage royalty can also spread the risk burdens. 1996 Q. the fixed unit royalty payment would most likely be chosen. the things he is maximizing must be expected magnitudes. maximizing utility. we can use it as a criterion to compare among various options so as to identify maximization choice. utility is an index ranking options according to the preference of an individual.

Considering a child as a consumption good. 8 In Hong Kong. If the income effect is smaller than the substitution effect. how would you explain the sharp fall in fertility rate? (5 marks) If a child is regarded as a consumption good.However. maximizing profit is the least useful postulate as it cannot be used to explain and predict human behaviour. Considering a child as an investment good. its existence has nothing to do with one’s expectation. Assuming that children are normal goods. The reasons for the rise in the cost of raising children may be that there is rising wage rate of female workers as well as domestic servants.3 in 1995. since profit is only unexpected increase in wealth. the rising level of rents and cost of obtaining a high quality education may also explain the rise in the cost of raising children. However.5 in 1965 to around 1. (a) A child may be regarded as a consumption good. we can use indifference curve analysis to explain the sharp fall infertility rate. from which a return or an income must be expected. (b) A child may be regarded as an investment good. the demand for children will fall from C2 to C3. how would you explain the sharp fall in fertility rate? (5 marks) A child may be regarded as an investment good as raising children is an act of reducing consumption now in the hope of increasing consumption in the future. a rise in income will increase the demand for children from C1 to C2. Thus. the demand for children falls from C1 to C3. 1996 Q. since the cost of raising children also increase. it is not useful or relevant in one’s decision making process as one cannot maximize what is unexpected. . the number of children an average woman expects to bear in a lifetime has fallen from 4. for which a cost or a price must be paid. Moreover. Hence.

e. (8 marks) By maximizer wealth. The reasons for the falling MEI or rate of return may be rising cost of raising children as well as falling apart of traditional family value. For example. The money so borrowed can be repaid be expected higher income at the later stage of one’s life. Moreover. . sons and daughters less willing to support their parents financially. the MEI curve shifts from MEI1 to MEI2. if MEI < r.g. If the income concerned is perpetuity. maximizing wealth enables a person to maximize consumption. they can accommodate different patterns of consumption over time by lending and borrowing. If MEI > r. investment will be made. W=I/r where W is wealth I is the annual income r is the market interest rate Whatever the pattern of consumption over time. 1 ‘In order to maximize consumption over time. rate of returns and market interest rate. On the other hand. low income at younger age can be matched to high consumption by borrowing. thus resulting the number of children in each household from C1 to C2.e. the number of children in each family has also decreased steadily.An individual’s investment decision depends on the relationship between marginal efficiency of investment (MEI). 1997 Q. Thus. we mean the maximization of the present value of income stream over time. the MEI of raising children has fallen steadily in recent years. as the MEI of rising children falls. As a result. i. the expected returns from children become lower than before.’ Do you agree? Explain. Given the market interest rate. The simple reason is that with greater wealth one can have greater consumption capability. even different individuals may have different patterns of income stream. Given the interest rate (r). the same investment will be abandoned. it is essential to maximize wealth.

with the result that he would study harder than when he does not have to pay and put a low marginal valuation on education. 8 University education in Hong Kong is heavily subsidized by the government. Of the numerous differences between these two systems. i. admission to university as well as the selections of university and field of study is based on examination results. his cost of investment increases. He may make a mistake in calculating this investment prospect. and this education loan must be repaid when the student gets a job after admission. his own marginal valuation of university education will also be high. The average quality of students entering university therefore increases. with the provision that any student may borrow from the government at the market rate interest to finance his university education. He therefore must have a higher expected rate of return before he decided to invest on education. (5 marks) Education is an investment. when each and every university sets a firm standard requirement for graduation and the award of a degree.Thus. (b) The quality of students admitted. the criterion of choosing different income stream is to choose the one which maximizes its present value.e. (5 marks) When a student is required to pay a high tuition out of his own pocket to buy university education. wealth. Under this system. Imagine that there is an alternative system in which students are admitted according to their willingness and ability to pay the higher price (tuition). but in general a poor quality student is less likely to invest in university education because his expected return is relatively low. He will therefore treasure education more. When a student has to borrow to pay a high tuition to enter a university. whatever the preference of consumption over time. 1997 Q. analyze only the following: (a) How hard students will study in a university. .

wealth cannot be measured. income. For income maximization. profit cannot be capitalized. such windfall gains are totally unexpected. 1 Given the postulate of constrained maximization. it is impossible to maximize something which is unexpected. Moreover. i. since rent may also fluctuate in different time period. one important point is that whether rent exists or not depends very much on a person’s viewpoint. wealth. Briefly comment on the shortcomings of each of these criteria of maximization. like income. rent. an individual may be said to maximize utility. since the wealth increase is unexpected. (10 marks) For utility maximization. since present income is worth more than future income. in this case we tend to make tautological statements and everything can then be explained by maximizing utility. simply adding up all income in different time periods gives an incorrect measure of the true market value of an income producing activity. maximizing income of one time period does not mean maximizing one’s life-long income. One problem with non-measurability is there are no objective criteria to make comparison. Another problem with non-measurability is without proper specification of constraints in the use of maximization postulate.1998 Q. Moreover. what he thinks his transfer earning is. thus maximizing something non-observable means maximizing something non-measurable. i. Thus. For rent.e. it cannot take into account non-pecuniary goods even though they are important to choice making. since wealth concerns only with marketable goods.e. Since profit is an unexpected increase in wealth. 3 . hence maximizing rent does not mean maximizing one’s life-long rent. income fluctuates in different time periods. since utility is non-observable. or profit. So profit maximization is irrelevant in one’s decision making process and cannot be used to explain and predict human behaviour. Furthermore. 1998 Q. without market interest rate. Moreover. if income is not expressed in annuity term. As wealth is the present value of income stream from assets.

Hence. a dollar of mandatory investment has the same value as a dollar of take home pay.. (6 marks) In equilibrium. the employer can simply cut the employees’ pay by 5% and then use this amount as the employer’s contribution to the Provident Fund. the amount paid to workers should remain unchanged. equipment. and if. With unchanged MRP as well as labour supply. then would you explain the adoption of the mandatory pension system? (6 . land.Labour. Do you agree? Explain. (a) If the Hong Kong labour market is freely competitive. education. education. How. money. land. money. compulsory) pension system (the Mandatory Provident Fund) will soon be introduced to all employees in Hong Kong. 6 A mandatory (i. they can all be defined as capital. there is no change in the amount employer pays as well as the amount an employee received. a dollar of mandatory investment has the same value as a dollar of take home pay. Under this system employers and employees will each contribute 5% of the employee’s salary to an investment fund. the net increase in income of an employee will be equal to zero. (b) International statistics indicate that most mandatory pension investments have yielded lower returns than voluntary private investment. equipment. to an employee. wage is equal to the marginal revenue product (MRP) of labour in a competitive labour market. good looks. the employee will be able to withdraw from his account the accumulated savings plus investment return. the capital value is equal to the discounted present value of an income stream from an asset. are all assets which can be used to generate income over time. etc. Since to the employee. In this case. roughly what would you expect to be the net increase in income of an employee as a result of the introduction of the provident fund? Explain. Since labour. good looks. 1998 Q. are all capital.e. etc. At the age of 65. (10 marks) As capital is defined as any asset which is capable of generating income over time.

The employees may therefore have an illusion that they actually gain from the MPF system. there are always some people who choose not to save. under voluntary private investment (or savings). the price of capital is equal to P = Y / MEI where P is the price of investment . i. With Y being the annuity income return to an investment and r be the rate of interest. Moreover. 1 Let Y be the annuity income return to an investment and r be the rate of interest. There will be social pressure to tale care of these people. although over time pay increases under the Mandatory Provident Fund will be less than with the system. we have to determine whether the investment is worthwhile or not. (6 marks) In making investment decision. This can be done by comparing the price and the present value i. Explain why Y divided by r is generally the simplest and most useful guideline for investment decision. of the investment.marks) Under political or labour union pressures. Thus. we have to discount the future income in order to arrive at the present value. many workers with relative low income have very limited investment alternatives available to them. and some of them may become a liability to society when they have to sleep out and beg in the streets when they become old.e. Since the investment can generate income in future. employers generally will not be successful in cutting employees’ pays by 5%. investment through mandatory provident fund would actually yield higher returns than making investment themselves. ‘the amount which enables us to obtain the same amount of income in the future’. 1999 Q. PV = Y / r where PV is present value Y is the annuity income r is the rate of interest On the other hand. On the other hand.e. the present value of the investment will be equal to Y divided by r.

income is a series of events. To engage in investment. 2003 Q. 4 According to the Irving Fisher. then the investment should not be made. if I read a book which can increase my skills or knowledge in specific fields such as information technology or law. MEI > r. reading a cook book or car repair book can be regarded as consuming as it generates interest but at the same time investing as it may enable me to generate income form the knowledge acquired. MEI < r. then the investment should be made. are you investing or consuming? (7 marks) In economics. more future consumption is expected to compensate for later availability. why? Is wealth also a series of events? Explain. we have to forgo present consumption for future consumption. we must note that in many cases both investment and consumption apply. earlier availability is preferred to later availability. investment occurs when future income can be expected from an act. (8 marks) . to justify the sacrifice of present consumption. While if the PV is lower than the price of the investment i. Hence.e. With positive marginal time preference. Thus. 2001 Q. 4 What is investment? When you read a book. whether I am investing or consuming depends on the outcome of the act. When I read a book.Y is the annuity income MEI is the marginal efficiency of investment If the PV is higher than the price of the investment i. However. investment is the balancing of consumption over time. If I read a book which only consists of information such as news of movie stars or sports. then I am consuming. On the other hand. For example.e. then I am investing as the knowledge acquired enables me to generate more income in future.

Wealth is not a series of events. such as friendship. 5 Interest would not exist without money. is far easier generating testable testing implications without falling into a tautological trap. Deriving a testable implication from a utility function is therefore difficult. Do you agree? Explain. 2 Explain the disadvantages and advantages of utility maximization as compared to wealth maximization. That bite is interest. (8 marks) Utility maximization is said to have the advantage of handling choices that have no market value price or pecuniary value. Money is not implied. Wealth is incomes at different periods of time discounted to one single present value. Look for substitutes at the margin. a wheat field grows or deteriorates every second. a nonpecuniary choice may then be converted to a pecuniary-choice equivalent. The disadvantage is that utility is not itself observable. Wealth or price or a pecuniary measure of choices. I loan you an apple. (8 marks) Disagree. not a flow. Remark: However. and tautological statements often result. 2005 Q. love and the like. For example. and without money this price or premium still exists. or even constant. 2004 Q.Income is a series of events because it is a flow and arises continuously through time. Interest is the price of earlier availability of goods. . they are nonetheless substitutable with pecuniary choices. meaning that events are continuously occurring through time. which may be positive or negative. One way out is that while prestige and friendship cannot themselves be measured in pecuniary terms. when you return it a year later. as they are not transacted in the market. These events have values. Wealth maximization complicates the handling of non-pecuniary choices. if available. our agreement would be your return an apple plus a bite from another apple. and in testing hypothesis all variables of a test implication must be observable. Therefore wealth is a stock defined at a particular point in time. called incomes. prestige.

Income is a cost because the highest valued option forgone is typically the same income. and the discounted present value of the income is capital value. This is a generalized concept of capital because any productive input capable of generating future income is a capital asset.4 What is capital when we refer to Fisher’s concept as a generalized concept of capital? Is there any difference between labour and capital? Capital is future income discounted. The difference between labours and machines can be distinguished in that they are different physical entities. Profit is not cost because it is windfall.END - .2007 Q. but they are all capital assets according to Fisher. In Fisher’s view. or if a change in use is considered. 2008 Q. 3 Is rent a cost? Is income a cost? Is interest a cost? What is not cost? (8 marks) Rent is a cost in that it is an opportunity forgone if outright sale is considered. . Interest is a cost because it is the whole of income. any resource that generates income is a capital asset. totally unanticipated and therefore cannot be counted as an option forgone.