Econ 2103 Practice Exam 2 - Larcher

Consider shares of common stock that will pay in total dividends $10 in year one, $30 in year two and $60 in year three. After the final dividend is paid the shares can be sold back for $90. Assume the benchmark index rate of return is 5%. What is the most likely price for the individual shares?

$166.30

Suppose Clifford recently discovers oil in his fields, which greatly excites him because he can earn a profit of $45.00 per barrel based on present market conditions. Because production costs will be lower in five years, Clifford deduces he can pump the oil out at a profit of $63.00 per barrel if he chooses to wait. If the interest rate currently is 5.00%, what is the present value of the future sum of money?

$49.4

Calculate the present discounted value of a 4 year, $1000 face value bond that pays a coupon of $99 and the benchmark rate is 8.5%.

$1045.85

A demand or supply curve with __________ would be horizontal in appearance.

Infinite elasticity

A four year bond with a face value of $1,000 pays $150 in interest at the end of years one, two, and three. The bond will pay $1,150 at the end of the fourth year, when it matures. If the interest rate remains constant at 5%, what is the present value of this bond? Enter your answer rounded to the nearest penny.

1354.6

Studies indicate that the price elasticity of demand for cigarettes is about 0.4. A government policy aimed at reducing smoking changed the price of a pack of cigarettes from $4 to $6. According to the midpoint method, the government policy should have reduced smoking by

16%

A financial gain earned by purchasing stock in a publically traded company and subsequently selling the investment at higher price is commonly referred to as a __________.

Capital gain

A 10% increase in the price of sugar leads to a 20% decrease in the quantity of iced tea demanded. It appears that:

Cross-price elasticity of demand for iced tea is -2. Divide: quantity/price

Other things being equal, a __________supply of workers tends to ___________ real wages.

Larger; decrease

In general, a steeper supply curve is more likely to be

Price inelastic

The smaller the price elasticity of demand, the

Steeper the demand curve will be through a given point.

The burden of a tax falls more heavily on the buyers in a market when

demand is inelastic and supply is elastic.

Demand is said to have unit elasticity if elasticity is

equal to 1

Workers at a bicycle assembly plant currently earn the mandatory minimum wage. If the federal government increases the minimum wage by $1.00 per hour, then it is likely that the

quantity supplied of bicycle assembly plant labor will increase.

When consumers and businesses have greater confidence that they will be able to repay in the future,________________________.

the quantity demanded of financial capital at any given interest rate will shift to the right.

A shift left of the labor demand curve will result in higher wages.

False

The demand for a necessity such as gasoline tends to be elastic.

False

The income earned from selling a share of stock at a higher price then you paid is called it dividend.

False

If the demand for a good is price inelastic, an increase in its price will increase total revenue in that market.

True

Usury laws are examples of price ceilings

True

Suppose you want to buy a $400,000 home in 12 years from now. Assume you will need to put 20% down for the mortgage. Currently you have $25,000 in the bank. What is the rate of interest you need to achieve to be able to afford the 20% down payment to take out the mortgage?

10%

Suppose that the interest rate is 10%. You are considering purchasing a bond that pays $15,000 in 4 years. What is the net present value of the bond?

10245.2