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  1. Chapter Twelve: Capital, Investment and New Technology

Chapter Twelve: Capital, Investment and New Technology

1
Question 1

Which of the following is not one of the four components of the gross return on capital?

a)
b)
c)
d)
e)
Correct.Incorrect. The answer is b) Value added tax.Your answer has been saved.
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2
Question 2

If a firm can rent a durable input for specific periods of time, which of the following is a correct statement of how much of the input a profit maximizing firm would wish to hire?

a)
b)
c)
d)
e)
Correct.Incorrect. The answer is d) It will rent the input up to the point where the rental cost per period is equal to the marginal revenue product of the input.Your answer has been saved.
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3
Question 3

Rounding to two decimal places, what is the present value today of £1,000 in two year's time, when the appropriate discount rate is 5 per cent per annum?

a)
b)
c)
d)
e)
Correct.Incorrect. The answer is b) £907.03Your answer has been saved.
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4
Question 4

Rounding to two decimal places, what is the present value today of £1,000 in three year's time, when the appropriate discount rate is 7 per cent per annum?

a)
b)
c)
d)
e)
Correct.Incorrect. The answer is a) £816.30Your answer has been saved.
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5
Question 5

Rounding to two decimal places, what will be the value in three year's time of £1,000 today, when the appropriate interest rate is 8 per cent per annum?

a)
b)
c)
d)
e)
Correct.Incorrect. The answer is c) £1259.71Your answer has been saved.
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6
Question 6

A firm that is trying to maximize its own present value should:

a)
b)
c)
d)
e)
Correct.Incorrect. The answer is b) Invest in any project that has a positive net present value.Your answer has been saved.
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7
Question 7

Which of the following best describes what the role of sunk costs in future investment decisions should be?

a)
b)
c)
d)
e)
Correct.Incorrect. The answer is a) Decisions concerning new investments should only be affected by the extra (marginal) cost and the extra (marginal) revenue generated, and sunk costs do not affect either of these so sunk costs should not affect the decision.Your answer has been saved.
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8
Question 8

The "winner's curse" in any auction contest may arise because:

a)
b)
c)
d)
e)
Correct.Incorrect. The answer is c) The winner has had to pay more than any other bidder was prepared to pay and this may be more than the object purchased is worth.Your answer has been saved.
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9
Question 9

North Sea fishing stocks are an example of a renewable resource. What are the implications of:

(a) the rate of catch being greater than the fish stock's ability to reproduce;
(b) the rate of catch being less than the fish stock's ability to reproduce;
(c) no North Sea fishing taking place by any country's fleet for the next twenty years.

What policies would you introduce to ensure that North Sea fish stocks are available as a food source for future generations? What are the economic and political implications of the policies you suggest?

Hint: Re-read the Chapter introduction on p250. Fishery conservation appears on the news at fairly regular intervals. You may find some of your ideas are being discussed by politicians right now! Hint

10
Question 10

What is the difference between the gross return on capital and the net return on capital?

Hint: Re-read the section 'The pure return on capital' on p251.Hint

11
Question 11

Assuming an interest rate of 7.5%, what is the most that an economic agent will pay for an asset that will generate £5,000 in five years time?

Hint: Re-read the section 'Present value of a single future payment' pp253-4, including Box 12.1. Hint

12
Question 12

Equation (2) on page 254 is often used to estimate the value of future benefits arising from an investment project. These can be compared with the present value of the future costs over the lifetime of the project to decide whether or not it is worthwhile to go ahead with the project. Should public-sector investments be judged using the same rate of interest as private-sector projects?

Hint: this is a more difficult question. You might wish to think about three issues.

(a) The benefits from public sector investments may arise a long time into the future whereas the costs may occur much closer to the present.

(b) What is the impact of using different rates of interest on the present value of a future return?

(c) In what ways can investment projects undertaken by governments be different from those undertaken by private sector firms?

Hint

13
Question 13

What factors will lead a firm to buy additional units of capital?

Hint: Re-read the section 'Equilibrium of the firm' on pp255-56.Hint

14
Question 14

What is the difference between a 'real interest rate' and a 'nominal interest rate'? Why is it important not to use the two rates inter-changeably?

Hint: Re-read the section 'Treatment of inflation' pp258-59.Hint

15
Question 15

Many multi-period investment decisions involve significant sunk costs, either in the sense that:

(a) sums of money have already been incurred in previous time periods; or
(b) the undertaking of a future investment would commit the agent to a significant and irreversible cost in the present (i.e. once paid, it can't be retrieved in the future).

For each case, consider the criteria that the economic agent should use in deciding whether or not to invest in the present.

Hint: Re-read the section 'Sunk costs' pp259-61.Hint

16
Question 16

How have developments in information and communication technology generated a 'revolution'?

Hint: re-read the section 'New Technology' pp261-65.Hint

17
Question 17

What is meant by the term 'winner's curse'?

Hint: re-read Box 12.5 p266.Hint