Chapter Questions
What major consideration distinguishes capital goods from other factors?
What complications are created for the theory of factor pricing by the fact that durable capital goods are used over a period of years?
What is the difference between capital widening and capital deepening?
What is meant by embodiment of technological change? What role does technological change play in investment decisions?
What is the internal rate of return?
Why do many firms turn to "rule-of-thumb" methods for investment decisionmaking?
What is the payback period rule? What are its limitations?
Under what circumstances is use of the "urgency of investment" rule warranted? What danger is involved in its use?
Indicate the various approaches to the introduction of risk calculations into investment decision making, along with the limitations of these approaches.
Indicate the nature of the cost of money capital under the borrowing, sale of stock, and plowback methods of financing investment.
Why are firms more likely to undertake marginal investment projects if they have their own funds for the purpose than if they must borrow the money or sell additional stock?
What is capital rationing? Why does it arise? What significance does it have for investment decisionmaking?
What are the major determinants of the total demand for capital goods?
What is the nature of the functional relationship between the price of capital goods and the quantity demanded? Why?
What are the major causes of changes in the demand for capital goods?
Why are payments for capital goods not in themselves factor payments? Do earned depreciation charges constitute factor incomes? Explain.