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

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

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

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

demand is inelastic and supply is elastic.

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.

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

False

Usury laws are examples of price ceilings

True

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

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

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%

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 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

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

The smaller the price elasticity of demand, the

Steeper the demand curve will be through a given point.

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

True

Demand is said to have unit elasticity if elasticity is

equal to 1

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.