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Exam 11: Input Demand: the Capital Market and the Investment Decision

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Question 1

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What is depreciation?

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Depreciation is the ...

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Question 2

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Why is knowledge considered a type of capital?

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Knowledge is human capital. Knowledge is considered capital because it yields valuable services to a firm over time in the same way that other types of capital (such as machinery) do.

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Why does it seem to be more difficult for investors to measure the capital stock of a firm like eBay rather than a firm like Ford Motor Company? Explain.

What is human capital?

What is meant by capital stock?

Why might stockholders be upset to find out that their company's profits that otherwise would have been distributed as dividends are instead invested in U.S. Treasury bonds?

What is the financial capital market? Who are the suppliers in the market? Who are the demanders?

What role do households play in the capital market? What role do firms play?

Suppose that you and your four siblings are given an opportunity to purchase a video rental store. Each of you would put up $50,000. The revenue from the store is expected to remain $350,000 per year for the next several years. The costs (not including the opportunity costs of your investment) of operating the store are expected to remain steady at $320,000 for the next several years. The current market rate of interest is 5 percent per year. Should you go in on this deal? Explain.

Assume an attorney who has worked with a large law firm decides to leave to establish his own practice. Even though he is not leaving the company with any physical assets what might be his most important asset? What factors might impede his ability to use this asset and why?

Explain how a firm makes an investment decision.

Give three examples of ways in which financial markets channel household savings into investment projects.

What is the most important dimension of capital and how does that relate to its value?

Why is the manager of a company typically not the same person as an entrepreneur?

Name two conditions that can cause a capital asset to depreciate.

What is the difference between stock and flow measures?

In economics, what is meant by investment?

An Internet start-up company consists of three people with an idea that they wish to use in pursuing a patent for a product. What type of capital does this company have and what is its value?

Why does capital depreciate?

Explain what is meant by capital.