Questions (22)
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.”
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.”
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.
4. 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.
5. 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?
6. 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?
7. 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 construction of a new highway past its
door.
c. The profit received by a firm benefiting from an unanticipated change in
consumer tastes
8.
Explain the absence of economic profit in a purely competitive, static economy.
Realizing that the major function of profits is to allocate resources according to consumer
preferences, describe the allocation of resources in such an economy.