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Economics Principles, Problems, and Policies

Campbell R. McConnell, Stanley L. Brue, Sean M. Flynn

Chapter 14

Rent, Interest, and Profit - all with Video Answers

Educators

Chapter Questions

01:37

Problem 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 very useful in guiding land into the most productive uses."

Jingchi Yan
Jingchi Yan
Numerade Educator
01:21

Problem 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."

Jingchi Yan
Jingchi Yan
Numerade Educator
02:13

Problem 3

In the 1980 s 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.

Jingchi Yan
Jingchi Yan
Numerade Educator
02:15

Problem 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?

Jingchi Yan
Jingchi Yan
Numerade Educator
03:17

Problem 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:
a. A 10 -year $\$ 1000$ government bond.
b. $A$ S20 pawnshop loan.
c. $A 30$ -year mortgage loan on a $\$ 145,000$ house.
d. $A 24$ -month $\$ 12,000$ commercial bank loan to finance the purchase of an automobile.
c. $\mathrm{A} 60$ -day $\$ 100$ loan from a personal finance company.

Jingchi Yan
Jingchi Yan
Numerade Educator
02:02

Problem 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.

Jingchi Yan
Jingchi Yan
Numerade Educator
02:34

Problem 7

Suppose that the interest rate is 4 percent. What is the future value of $\$ 100$ four years from now? How much of the future value is total interest? By how much would total interest be greater at a 6 percent interest rate than at a 4 percent interest rate?

Jingchi Yan
Jingchi Yan
Numerade Educator
01:40

Problem 8

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.

Jingchi Yan
Jingchi Yan
Numerade Educator
01:31

Problem 9

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?

Jingchi Yan
Jingchi Yan
Numerade Educator
00:53

Problem 10

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?

Jingchi Yan
Jingchi Yan
Numerade Educator
00:22

Problem 11

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?

Jingchi Yan
Jingchi Yan
Numerade Educator
01:41

Problem 12

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:
a. 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.

Jingchi Yan
Jingchi Yan
Numerade Educator
01:13

Problem 13

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?

Jingchi Yan
Jingchi Yan
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00:26

Problem 14

Explain the absence of economic profit in a purely competitive, static economy. Realizing that the major function of profit is to allocate resources according to consumer preferences, describe the allocation of resources in such an economy.

Jingchi Yan
Jingchi Yan
Numerade Educator
00:50

Problem 15

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?

Jingchi Yan
Jingchi Yan
Numerade Educator
00:55

Problem 16

Assume that you borrow $\$ 5000$ and 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?

Catt Huth
Catt Huth
Numerade Educator