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Unformatted text preview: Chapter 14 Practice Test Rent, Interest and Profit 1. Use the following diagrams to answer the next question. Refer to the diagrams. These diagrams illustrate three grades of land available for development of a new shopping complex. The same amount of labor, capital, and other inputs for the shopping complex would be used regardless of which land is chosen. In terms of the lands ability to generate potential revenue for the developers, we can say that: a. land in figure a is most productive b. land in figure b is most productive c. land in figure c is most productive d. we cannot compare the productivity of the three grades of land Answer: c Feedback: Under the stated conditions, the demand for the land will differ solely because of differences in the productivity of the land. In this example, the land in figure c is most productive. 2. With respect to land rents: a. demand is a passive determinant and supply an active determinant b. supply is a passive determinant and demand an active determinant c. both supply and demand are active determinants d. neither supply nor demand are active determinants Answer: b Feedback: The supply of land is fixed, so that differences in land rents are fully determined by differences in the demand for land. 3. True or false: Economic rent is a price paid for a productive resource whose supply is perfectly elastic a. True b. False Answer: b Feedback: Rent is the price of a resource whose supply is fixedperfectly inelastic rather than elastic. 4. Suppose Congress, in an attempt to increase taxes on the wealthy, passed a law doubling the tax rate on interest income. The effect of this law would be most likely to: a. increase the supply of loanable funds and decrease the equilibrium interest rate b. decrease the supply of loanable funds and increase the equilibrium interest rate c. increase the demand for loanable funds and increase the equilibrium interest rate d. decrease the demand for loanable funds and decrease the equilibrium interest rate Answer: b Feedback: Higher taxes on interest income would deter individuals from saving, a major source of loanable funds. The reduction in supply would drive up the equilibrium interest rate. Of course for the savers, the interest rate received net of paying the tax will likely decline. 5. Since 1900, combined income from rent, corporate profit, and interest in the U.S. has: a. varied inversely with changes in the rate of inflation b. increased in proportion to changes in technology c. decreased in proportion to the decline in self-employment d. remained relatively constant Answer: d Feedback: Broadly defined, such capitalist income has remained approximately 20% of total income since 1900....
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- Spring '11