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# Basic concepts in Finance

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1.) Sue and Neal are twins. Sue invests \$5,000 at 7 percent when she is 25 years old. Neal invests \$5,000 at 7 percent when he is 30 years old. Both investments compound interest annually. Both Sue and Neal retire at age 60. Which one of the following statements is correct assuming that neither Sue nor Neal has withdrawn any money from their accounts?

1) If both Sue and Neal wait to age 70 to retire, then they will have equal amounts of savings.
2) Neal will earn more interest on interest than Sue.
3) Sue will have less money when she retires than Neal.
4) Sue will have more money than Neal as long as they retire at the same time.
5) Neal will earn more compound interest than Sue.

2.) Andy deposited \$3,000 this morning into an account that pays 5 percent interest, compounded annually. Barb also deposited \$3,000 this morning into an account that pays 5 percent interest, compounded annually. Andy will withdraw his interest earnings and spend it as soon as possible. Barb will reinvest her interest earnings into her account. Given this, which one of the following statements is true?

1) Andy will earn more interest in year three than Barb will.
2) Barb will earn interest on interest.
3) After five years, Andy and Barb will both have earned the same amount of interest.
4) Barb will earn more interest the first year than Andy will.
5) Andy will earn compound interest.

3,) Luis is going to receive \$20,000 six years from now. Soo Lee is going to receive \$20,000 nine years from now. Which one of the following statements is correct if both Luis and Soo Lee apply a 7 percent discount rate to these amounts?

1) Soo Lee's money is worth more than Luis' money given the 7 percent discount rate.
2) Twenty years from now, the value of Luis' money will be equal to the value of Soo Lee's money.
3) The present values of Luis and Soo Lee's monies are equal.
4) In today's dollars, Luis' money is worth more than Soo Lee's.
5) In future dollars, Soo Lee's money is worth more than Luis' money.

4.) Steve invested \$100 two years ago at 10 percent interest. The first year, he earned \$10 interest on his \$100 investment. He reinvested the \$10. The second year, he earned \$11 interest on his \$110 investment. The extra \$1 he earned in interest the second year is referred to as:

1) interest on interest.
2) simple interest.
3) present value interest.
4) free interest.
5) bonus income.

5.) Tracy invested \$1,000 five years ago and earns 4 percent interest on her investment. By leaving her interest earnings in her account, she increases the amount of interest she earns each year. The way she is handling her interest income is referred to as which one of the following?

1) accumulation
2) discounting
3) simplifying
4) aggregation
5) compounding

#### Solution Preview

1.) Sue and Neal are twins. Sue invests \$5,000 at 7 percent when she is 25 years old. Neal invests \$5,000 at 7 percent when he is 30 years old. Both investments compound interest annually. Both Sue and Neal retire at age 60. Which one of the following statements is correct assuming that neither Sue nor Neal has withdrawn any money from their accounts?

1) If both Sue and Neal wait to age 70 to retire, then they will have equal amounts of savings.
2) Neal will earn more interest on interest than Sue.
3) Sue will have less money when she retires than Neal.
4) Sue will have more money than Neal as long as they retire at the same time.
5) Neal will earn more compound interest than Sue.

4) Sue will have more money than Neal as long as they retire at the ...

#### Solution Summary

Solution chooses correct alternatives.

\$2.19

## Multiple choice questions in microeconomics

1.Scarcity
1.exists because people have wants that are unlimited relative to the availability of resources to satisfy those wants
2.creates a need for society to allocate goods according to some set of criteria
3.means that society and individuals must make choices
4.exists in all societies
5.all of the above
2.In economics, capital is defined as (Think about the factors of production.)
1.natural resources, such as water, oil, and iron ore
2.the natural, unskilled abilities of people
3.human creations used in the production process
4.money and other financial assets
5.the willingness of business owners to take risks

3.According to the law of comparative advantage, an individual should produce a good if he or she
1.can produce it with the fewest resources
2.has an absolute advantage of producing the good.
3.has the lowest opportunity cost of producing the good regardless of whether it is produced with the fewest resources
4.has the greatest opportunity cost of producing the good regardless of whether it is produced with the fewest resources
5.has the greatest opportunity cost of producing the good and produces it with the fewest resources

4.The effect of a decrease in the price of laptop computers, other things constant, is likely to be best represented by which of the following?
1.a leftward shift of the demand curve.
2.a movement up along the demand curve
3.a rightward shift in the demand curve
4.a movement down along the demand curve
5.a leftward shift in the supply curve

5.Which of the following will not change the demand for movie tickets?
1.a change in the cost of babysitting services
2.a change in the price of movie tickets
3.a change in the quality of television programs
4.a change in the income of movie-goers
5.a change in the number of consumers

6.Which of the following would be most likely to increase the demand for downtown parking in a large city?
1.improved bus service to the downtown area
2.lower downtown parking fees
3.more downtown parking lots
4.more freeways leading to the downtown area
5.a major employer moves to the suburbs

7.Attempts are being made to develop a biodegradable plastic using agricultural produce such as potatoes. If these attempts are successful, what will happen to the equilibrium price and quantity of potatoes? (You may want to relate this question to what has recently happened with corn and ethanol.)
1.Price will increase and quantity decrease.
2.Price will increase and quantity increase.
3.Price will decrease and quantity increase.
4.Price will decrease and quantity decrease.
5.No change in equilibrium and quantity will occur.

8.If an increase in the price of a product from \$100 to \$200 per unit leads to a decrease in the quantity demanded from 10 to 8 units, then demand is
1.elastic
2.inelastic
3.unit elastic
4.0
5.inferior

9.Two separate groups of people use New York City subways. One group uses them only during rush hour to travel to and from work. The other group uses them only in midday for leisure activity. If New York City wants to increase transit fares with the smallest possible reduction in revenue, for which group should it increase the fare?
1.The rush-hour group because its demand for subway service is more elastic than that of the midday group.
2.The rush-hour group because its demand for subway service is less elastic than that of the midday group.
3.The midday group because its demand for subway service is more elastic than that of the rush-hour group.
4.The midday group because its demand for subway service is less elastic than that of the rush-hour group.
5.It doesn't matter because both groups have the same elasticity of demand.

10.As price falls along a given demand curve for pretzels,
1.quantity demanded, total utility, marginal utility, and consumer surplus increase; consumer expenditure decreases.
2.quantity demanded, total utility, and consumer surplus increase; marginal utility and consumer surplus decrease
3.quantity demanded, total utility, consumer surplus, and consumer expenditure increase; marginal utility decreases
4.quantity demanded, total utility, and consumer surplus increase; marginal utility decreases; consumer expenditure might increase, decrease, or remain constant
5.quantity demanded, total utility, marginal utility, consumer surplus, and consumer expenditure all increase

11.Suppose a lawyer leaves his \$70,000-a-year job and starts his own firm breeding pit bulls. In the first year, his accounting profits are \$90,000. The lawyer finances his new business with \$100,000 from his savings account, which had earned 10 percent interest. If this is all of the implicit and explicit revenues and costs his economic profit is
1.\$10,000
2.\$60,000
3.\$70,000
4.-\$80,000
5.-\$90,000

12.Farmer Fanny sells her crops in a perfectly competitive market. If she produces 500 bushels for total revenue of \$3,000 and if harvesting the 501st bushel would raise her total cost from \$2,500 to \$2,510, her
1.revenue will increase by \$4 if she harvests the 501st bushel
2.revenue will fall by \$4 if she harvests the 501st bushel
3.average fixed cost will rise if she harvests the 501st bushel
4.profit will fall by \$10 if she harvests the 501st bushel
5.profit will fall by \$4 if she harvests the 501st bushel

13.What is true at the profit-maximizing quantity for a nondiscriminating monopolist but not true of a perfectly competitive firm?
1.Price equals marginal cost.
2.Price is greater than marginal cost.
3.Marginal revenue equals marginal cost.
4.Marginal revenue is less than marginal cost.
5.Marginal revenue is greater than average revenue.

14.Which of the following is common to all market structures?
1.All of the following are correct.
2.Each firm must be able to earn sufficient revenue to cover its variable cost in order to continue producing in the short run.
3.The demand curve for the firm's output and the firm's average revenue curve are the same.
4.If it can earn a profit, the firm should increase production as long as marginal revenue exceeds marginal cost.
5.Each firm must be able to earn sufficient revenue to cover its total cost in order to continue operating in the long run.

15.Which of the following could explain an increase in demand for labor? (Think about our discussions of human capital.)
1.additional training that increases the productivity of each unit of labor in this market
2.an increase in the amount of risk associated with this job
3.a decrease in the amount of risk associated with this job
4.an improvement in the working conditions associated with this job
5.a decline in the working conditions associated with this job

16.Which of the following affects the interest rate on a loan?
1.all of the following
2.the duration of the loan
3.the tax treatment of the loan
4.the administrative cost of the loan
5.the risk of default on the loan

17.The marginal social cost of air quality increases as air quality decreases. If the dirtiest production process would create 700 tons of pollutants, then
1.eliminating the first 20 tons of pollution is cheaper than eliminating the last 20 tons.
2.eliminating the last 20 tons of pollution is cheaper than eliminating the first 20 tons.
3.more damage will be done by the first 20 tons of pollution than by the last 20 tons
4.twice as much damage will be done by the last 20 tons of pollution than by the first 20 tons
5.the optimal level of air quality is to reduce polluting by 700 tons

18.Which of the following is a positive externality of consumption?
1.Inoculations against a disease reduce the likelihood of transmitting it to others
2.Phosphates from laundry detergents
3.Litter from fast-food containers
4.Ozone depletion from the production of fast-food containers
5.The greenhouse effect

19.Which of the following best expresses the benefit from international trade?
1.With trade, each country can concentrate on producing those goods and services where it has a comparative advantage.
2.With trade, a country can increase its political involvement on a global scale.
3.Increased U.S. trade will improve high-tech exports but not agricultural exports.
4.Increased trade will increase U.S. exports and decrease U.S. imports.
5.Increased trade implies that exports of goods and services will always equal imports of goods and services.

20.Over the last 20 years, in countries around the world (Recent events in the US may lead you to think differently but if you agree with the e-text and look world statistics the answer is a. I hope you have discovered from this class the positive relationship between economic freedom and growth.)
1.markets are replacing central planning
2.central planning is replacing capitalist market coordination
3.economic systems are stable and unchanging
4.all countries employ the same system of resource ownership, resource allocation, and incentives to answer the basic economic questions
5.none of the above

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