14.1 How
does the economist’s use of the term “rent” differ from everyday usage?
Explain: “Though rent need not be paid by society to make land
available, rental payments are useful in guiding land into the most
productive uses.” L01
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14.2 Explain
why economic rent is a surplus payment when viewed by the economy as a
whole but a cost of production from the standpoint of individual firms
and industries. Explain: “Land rent performs no ‘incentive function’ for the overall economy.” L01
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14.3 In
the 1980s land prices in Japan surged upward in a “speculative bubble.”
Land prices then fell for 11 straight years between 1990 and 2001. What
can we safely assume happened to land rent in Japan over those 11 years? Use graphical analysis to illustrate your answer. L01
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14.4 How
does Henry George’s proposal for a single tax on land relate to the
elasticity of the supply of land? Why are there so few remaining
advocates of George’s proposal? L03
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14.5 If
money is not an economic resource, why is interest paid and received
for its use? What considerations account for the fact that interest
rates differ greatly on various types of loans? Use those considerations
to explain the relative sizes of the interest rates on the following: L02a. A 10-year $1000 government bond.b. A $20 pawnshop loan.c. A 30-year mortgage loan on a $175,000 house.d. A 24-month $12,000 commercial bank loan to finance the purchase of an automobile.e. A 60-day $100 loan from a personal finance company,
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14.6 Why
is the supply of loanable funds upsloping? Why is the demand for
loanable funds downsloping? Explain the equilibrium interest rate. List
some factors that might cause it to change. L02
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14.7 Here
is the deal: You can pay your college tuition at the beginning of the
academic year or the same amount at the end of the academic year. You
either already have the money in an interest-bearing account or will
have to borrow it. Deal, or no deal? Explain your financial reasoning.
Relate your answer to the time-value of money, present value, and future
value. L04
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14.8 What
are the major economic functions of the interest rate? How might the
fact that many businesses finance their investment activities internally
affect the efficiency with which the interest rate performs its
functions? L03
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14.9 Distinguish
between nominal and real interest rates. Which is more relevant in
making investment and R&D decisions? If the nominal interest rate is
12 percent and the inflation rate is 8 percent, what is the real rate
of interest? L03
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14.10 Historically,
usury laws that put below-equilibrium ceilings on interest rates have
been used by some states to make credit available to poor people who
could not otherwise afford to borrow. Critics contend that poor people
are those most likely to be hurt by such laws. Which view is correct? L03
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14.11 How
do the concepts of accounting profit and economic profit differ? Why is
economic profit smaller than accounting profit? What are the three
basic sources of economic profit? Classify each of the following
according to those sources: L04a.
A firm’s profit from developing and patenting a new medication that
greatly reduces cholesterol and thus diminishes the likelihood of heart
disease and stroke.b. A restaurant’s profit that results from the completion of a new highway past its door.c. The profit received by a firm due to an unanticipated change in consumer tastes.
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14.12 Why
is the distinction between insurable and uninsurable risks significant
for the theory of profit? Carefully evaluate: “All economic profit can
be traced to either uncertainty or the desire to avoid it.” What are the
major functions of economic profit? L04
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14.13 What
is the combined rent, interest, and profit share of the income earned
by Americans in a typical year if proprietors’ income is included within
the labor (wage) share? LO5
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14.14 LAST WORD
Assume that you borrow $5000, and you pay back the $5000 plus $250 in
interest at the end of the year. Assuming no inflation, what is the real
interest rate? What would the interest rate be if the $250 of interest
had been discounted at the time the loan was made? What would the
interest rate be if you were required to repay the loan in 12 equal
monthly installments?
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