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This Document Contains Chapters 15 to 16 Chapter 15 The Labor Market MULTIPLE CHOICE 1. Which of the following is a true statement about leisure? A. When the salary of a low income earner increases, it often becomes possible to increase both labor and leisure. B. Standing in line at the bank is not enjoyable and as a result is not considered leisure. C. If someone enjoys his or her job, then the time he or she spends at work is considered leisure. D. Leisure will always decrease as a person’s wage increases. E. Leisure includes all hours that a person spends away from a paying job, regardless of how this time is spent. Answer: E 2. Which of the following best explains the shape of the individual labor-supply curve? A. The individual labor-supply curve is exactly like any supply curve, it always has a positive slope. B. The individual labor-supply curve slopes downward at all wage rates because, as wages increase, people are able to buy more leisure. C. The individual labor-supply curve slopes upward at lower wage rates and then bends back at higher wage rates. D. The individual labor-supply curve must be vertical because each person can work only eight hours per day. E. The individual labor-supply curve must be horizontal because labor markets are assumed to be perfectly competitive. Answer: C 3. It is said that a wage increase can have two opposing effects. Which of the following captures these two effects? A. A backward-bending labor-supply curve B. A perfectly elastic labor-supply curve C. A perfectly inelastic labor-supply curve D. The inability of average wage earners to comprehend the complexities of economic principles. E. A backward-bending labor-demand curve Answer: A 4. Which of the following is a reason that some economists do not agree with the concept of a labor-leisure tradeoff? A. Wages are paid in dollars and leisure is measured in time, hence there is no way to compare the two. B. On a day-to-day basis, most jobs do not have the flexibility to allow people to weigh the benefits and costs to determine how much they should work that day. C. In the long-run, the supply of labor hours is perfectly inelastic. D. An increase in the wage rate always leads to an increase in the supply of labor hours. E. Some people do not work at all, so there is no labor-leisure tradeoff for those individuals. Answer: B NARRBEGIN: Figure 15. 1 The figure below shows the supply curve for labor. Figure 15. 1 NARREND 5. Refer to Figure 15. 1. When wage rate increases from W2 to W3 : A. quantity of labor supplied increases from Q2 to Q4. B. quantity of labor supplied decreases from Q3 to Q4. C. quantity of labor supplied increases from Q4 to Q5. D. quantity of labor supplied increases from Q2 to Q4. E. quantity of labor supplied increases from Q3 to Q5. Answer: E 6. Refer to Figure 15. 1. When wage rate increases from W3 to W5: A. quantity of labor supplied increases from Q1to Q4. B. quantity of labor supplied decreases from Q5 to Q2. C. quantity of labor supplied increases from Q2 to Q4. D. quantity of labor supplied decreases from Q4 to Q2. E. quantity of labor supplied increases from Q1 to Q54. Answer: B 7. Which of the following statements contradicts the upward-sloping market-supply curve?` A. All people have backward-bending individual supply curves B. Leisure is more enjoyable than work C. The elasticity of labor supply is larger than the elasticity of labor demand. D. More work means less leisure E. The opportunity cost of leisure decreases with an increase in wage rate. Answer: A 8. Why is the market supply curve of labor positively sloped though individual supply curves are backward-bending beyond a certain wage rate? A. People tend to work less when wage rate increases. B. Every individual laborer has equal trade offs between labor and leisure. C. People tend to substitute labor for leisure. D. People work more for the fear of losing their jobs and becoming unemployed. E. All the individual supply curves do not bend backward at one particular wage rate. Answer: E 9. As the wage rate increases, the quantity supplied of labor in a market will: A. invariably increase B. invariably decrease. C. first increase and then decrease. D. first decrease and then increase. E. remain constant. Answer: C 10. The labor market is in equilibrium when: A. the demand curve lies above the supply curve. B. both demand and supply curves are positively sloped. C. both demand and supply curves are negatively sloped. D. the demand curve intersects the supply curve. E. the demand curve is negatively sloped but the supply curve is positively sloped. Answer: D 11. The labor demand curve is based on the firm’s: A. average revenue curve. B. marginal product curve. C. marginal cost curves. D. average cost curves. E. marginal revenue product curve. Answer: E 12. Why does the labor market have more than one equilibrium wage rate? A. Workers differ in their productivities. B. Productivity of the workers initially increase but later decline. C. The labor demand curve is backward bending. D. Marginal revenue product of the different inputs used by firms vary. E. Employers compete among themselves to hire the best workers. Answer: A NARRBEGIN: Figure 15. 2 The figure given below shows the demand curves (D1 and D2) and supply curves (S1 and S2) of labor in the labor market. Figure: 15. 2 NARREND 13. Refer to Figure 15. 2. At the initial equilibrium (when demand is D1 and supply is S1), the wage rate and labor employment are: A. $7 and 20 laborers. B. $8 and 30 laborers. C. $6 and 50 laborers. D. $5 and 20 laborers. E. $5 and 10 laborers. Answer: A 14. In Figure 15. 2, the initial labor supply is S1 , and the labor demand is D1. If the wage is $6, which of the following is correct? A. The actual wage is above the equilibrium wage. B. There is a shortage of 30 workers. C. There is a shortage of 20 workers. D. There is a shortage of 10 workers. E. The market is in equilibrium. Answer: C 15. According to Figure 15. 2, assume that the market is in an initial equilibrium in which the labor supply is S1 and the labor demand is D1. Then labor supply shifts from S1 to S2 but the wage remains at its previous equilibrium level. Which of the following is true? A. The economy is still in equilibrium. B. There is a shortage of 20 workers. C. There is a shortage of 30 workers. D. There is a surplus of 30 workers. E. There is a surplus of 20 workers. Answer: E 16. The term compensating wage differential refers to: A. the bargaining capacity of a monoposonist in the labor market. B. wage differences that arise from differences in the risk involved in different jobs C. whether or not a firm offers a 401K plan to all its employees or just some employees. D. wage differences that arise from difference in productivity of the workers in a firm. E. the negotiating powers of the trade union. Answer: B 17. Which of the following professionals is likely to receive higher compensatory wages? A. Financial accountants B. Software engineers C. Sales workers D. Share traders E. Tailors Answer: C 18. Which of the following is not a reason for compensating wage differentials? A. To compensate for the risk involved in certain jobs B. The supply of laborers usually outnumbers its demand in these jobs C. Such professions involve a high probability of life loss D. To attract more laborers in risky professions E. The working condition of some jobs are unpleasant Answer: B NARRBEGIN: Figure 15. 3 The figures given below show the demand (D)and supply (S) curves of labor in two different markets. Figure 15. 3 NARREND 19. Refer to Figure 15. 3. If the wage rates in market A and market B were set at $15, then: A. there would be a shortage of workers in both markets. B. there would be a surplus of workers in both markets. C. there would be a shortage of workers in market A and a surplus of workers in market B. D. there would be a shortage of workers in market B and a surplus of workers in market A. E. the market as a whole would be in equilibrium. Answer: C 20. Refer to Figure 15. 3. If the wage rates in market A and market B were set at $20, then: A. both the markets would be in equilibrium. B. there would be a shortage of workers in market A and a surplus of workers in market B. C. there would be a shortage of workers in market B and a surplus of workers in market A. D. there would be a surplus of workers in both markets. E. there would be a shortage of workers in both markets. Answer: D 21. From Figure 15. 3, calculate the amount of the wage differential. A. $6 B. $18 C. $2 D. $20 E. $15 Answer: A 22. Which of the following is a reason for the wage differential shown in Figure 15. 3? A. The workers in Market B are more productive than the workers in Market A. B. The workers in Market B are unionized whereas the workers in Market A are not. C. Market B hires a larger number of skilled workers than Market A. D. Market A represents the market for a risky occupation. E. Working conditions offered by the firms in Market B are uncongenial. Answer: D 23. Which of the following refers to human capital? A. Money spent by business to acquire labor B. The acquired skill and productivity of workers C. The plant and equipment used with labor D. Money spent on education. E. Money that workers save Answer: B 24. Why do skilled workers earn relatively higher wages than unskilled workers? A. The marginal productivity of skilled workers is low. B. The marginal cost of hiring skilled workers is low. C. The supply of skilled workers is relatively less. D. There is an abundant supply of skilled workers. E. There is an abundant supply of unskilled workers. Answer: C 25. If the supply of skilled workers is increased such that it is equal to the supply of unskilled workers, we can expect: A. wages of skilled workers to be equal to wages of unskilled workers. B. wages of skilled workers to be lower than wages of unskilled workers. C. wages of skilled workers to be higher than wages of unskilled workers. D. wages to fall from current levels for unskilled workers. E. wages of both skilled and unskilled workers to remain unaffected. Answer: C 26. Investment in human capital implies: A. investment on machines, technological development, and equipments. B. expenses on education. C. expenses on paying interest for hiring real capital. D. expenses related to the purchase of land. E. profit of the entrepreneurs. Answer: B 27. Which of the following statements is true? A. Income earned by a worker with a college degree grows more rapidly than a worker without a college degree during their early working years. B. A worker with a college degree always earns less than a worker without a college degree. C. A worker with a college degree initially earns more than a worker without a college degree but the latter surpasses the former in due course of time. D. A worker without a college degree initially earns more than a worker with a college degree but the latter surpasses the former in due course of time. E. Both the workers earn equal incomes after a certain period of time. Answer: D 28. A college student’s choice of a major and an occupation reflects: A. what each college student expects wage inflation to be in the future. B. a lack of information on the part of the students. C. a lack of proper education and vocational training. D. the return on investment in human capital. E. the opportunity costs each college student faces. Answer: E 29. The ratio of the median income of college-to high school-educated workers is called the _____. A. college income premium B. college income differential C. college income benefit D. college income compensation E. education income gap Answer: A 30. An individual is induced to change his/her occupation if: A. the sunk cost of the current occupation is high. B. the expected net gains from the alternative occupation is negative. C. the outlook for future income increases in the current occupation is as good as another occupation. D. he/she has devoted a lot of money time and effort in the current occupation. E. the marginal cost of remaining in the current occupation is very high. Answer: E 31. Why are a large number of IT jobs being outsourced to China and India? A. India and China experience large balance of payment deficits. B. India and China are highly capital intensive economies. C. India and China have abundant supply of cheap skilled labor. D. India and China have abundant supply of unskilled labor. E. India and China are rich in natural resources. Answer: C 32. Which of the following is a major impact of offshoring? A. Elimination of domestic jobs B. Elimination of jobs in foreign countries C. Creation of jobs in the domestic country D. An increase in the cost of production of domestic firms E. A reduction in the cost of production of foreign firms Answer: A 33. A large number of U. S. firms send jobs to low-wage nations as it enables them to: A. raise the price of their products. B. reduce their cost of production. C. get better quality products. D. obtain diversified products. E. politically dominate the economies where they are offshoring. Answer: B NARRBEGIN: Figure 15. 4 The figure given below shows the demand curve in the U. S. and the cost curves in U. S. and India. Figure: 15. 4 In the figure: MC: Marginal cost curve ATC: Average total cost curve D: Demand curve in the U. S. MR: Marginal revenue curve in the U. S. NARREND 34. According to Figure 15. 4, the price and quantity of the good if produced by U. S. would be _____ and _____ respectively. A. P1; Q1 B. P3; Q3 C. P2; Q4 D. P2; Q2 E. P4; Q4 Answer: D 35. In Figure 15. 4, the price and quantity of the good if produced by India would be _____ and _____ respectively. A. P3; Q3 B. P4; Q4 C. P1; Q1 D. P5; Q5 E. P2; Q2 Answer: A 36. According to Figure 15. 4, one of the possible outcomes of such offshoring is that: A. the price of the good in question rises in the U. S. market. B. the demand for Indian labor declines. C. the demand for U. S. workers increase. D. the price of the good in question rises in the Indian market. E. the Indian workers replace the U. S. workers. Answer: E 37. Why has the inequality of income become greater? A. The demand for skilled workers has declined. B. The demand for skilled workers has remained constant and the demand for unskilled workers has declined. C. The government policies went against the unskilled workers. D. The demand for skilled workers has increased and the demand for unskilled workers has not kept pace. E. The demand for unskilled workers increased as they could be hired for lower wages. Answer: D 38. The U. S. government has time and again raised the minimum wage to: A. ensure that the skilled workers make a decent living. B. increase the elasticity of labor supply. C. earn greater tax revenue. D. ensure that the unskilled workers make a decent living. E. safeguard the interests of the employers. Answer: D 39. Minimum wage legislation by the government would: A. create labor shortage. B. create labor surplus. C. not affect the labor market. D. benefit the firms. E. increase income inequality in the country. Answer: B 40. The intention of a minimum wage is to: A. keep the wage rate at par with the equilibrium wage. B. keep the wage rate below the equilibrium wage. C. raise the wage rate above the equilibrium wage. D. keep the wage rate at par with the wage of the skilled workers. E. make the wages of the skilled and unskilled workers equal. Answer: C NARRBEGIN: Figure 15. 5 The following figures show the demand and supply of labor in two different types of labor market. Figure 15. 5 In the figures, D: Demand curve for labor S: Supply curve of labor MRP: Marginal revenue product MFC: Marginal factor cost NARREND 41. The Market A described in Figure 15. 5 is a(n): A. monopsonist market. B. monopolistic market. C. perfectly competitive labor market. D. monopolistically competitive market. E. oligopolistic market. Answer: C 42. The Market B described in Figure 15. 5 is a(n): A. perfectly competitive labor market. B. monopolist market. C. oligopolistic market. D. monoposonistic market. E. monopolistically competitive market. Answer: D 43. In Figure 15. 5, the equilibrium wage rate and the level of employment in Market A are _____ and _____ respectively. A. $8; 15 hours. B. $10; 10 hours. C. $10; 20 hours. D. $12; 25 hours. E. $6; 20 hours. Answer: A 44. Refer to Figure 15. 5. If a minimum wage of $10 is set by the government, then in market A: A. a shortage of 20 labor hours is created. B. the quantity demanded for labor rises to 20 labor hours. C. a shortage of 15 labor hours is created. D. a surplus of 20 labor hours is created. E. a surplus of 10 labor hours is created. Answer: E 45. In Figure 15. 5, if a minimum wage of $10 is set by the government, then in market B: A. wage increases but labor employment decreases. B. wage increases but labor employment remains constant. C. wage decreases from $12 to $10. D. both wage and employment increase. E. both wage and employment decrease. Answer: D 46. The burden of a tax is mainly borne by the buyer if: A. the supply of the good is perfectly price elastic. B. if the supply of the good is relatively price elastic. C. if the demand for the good is relatively price elastic. D. if the demand for the good is relatively price inelastic. E. if the demand for the good is perfectly price elastic. Answer: D 47. Suppose a tax rate of 10 percent applies to all income up to $20,000 a year, income above $20,000 up to $50,000 a year is taxed at a rate of 15%, and income above $50,000 a year is taxed at 20%. Calculate the absolute amount of tax paid by a person whose annual income is $30,000. A. $2,000 B. $2,500 C. $4,500 D. $4,000 E. $3,500 Answer: E 48. An increase in the income tax rates: A. makes the labor supply curve more inelastic. B. increases the opportunity cost of leisure. C. lowers the opportunity cost of leisure. D. shifts the labor supply curve to the right. E. shifts the labor demand curve to the right. Answer: C NARRBEGIN: Figure 15. 6 The figure given below shows the income-leisure trade off of an individual. Figure 15. 6 AB and AC: Income constraints of the individual I1, I2, and I3 curves show the income leisure choices of the individual. NARREND 49. In Figure 15. 6, if the income constraint of the individual is given by the line AB, he maximizes his utility by choosing _____ hours of leisure and earns an income of _____. A. 0; Y2 B. L1; Y7 C. L2; Y5 D. L3; Y4 E. L4; Y7 Answer: B 50. In Figure 15. 6, if the income constraint of the individual is given by the line AC, he maximizes his utility by choosing _____ hours of leisure and _____ units of income. A. L1; Y5 B. 0; Y7 C. L3; Y3 D. L2; Y3 E. L4; Y4 Answer: D 51. Which of the following factors is likely to be responsible for the inward rotation of the income constraint from AB to AC in Figure 15. 6? A. An increase in income B. An increase in demand for labor C. An increase in the income tax rate D. A decrease in the opportunity cost of labor E. A decrease in the supply of labor Answer: C 52. If the tax rate increases with increase in income, the income tax structure is said to be _____. A. proportional B. regressive C. progressive D. leptokurtic E. negatively skewed Answer: C 53. According to the U. S. population surveys conducted by the census, since 1980 the total foreign-born population as a percentage of the total U. S. population: A. has not changed. B. has declined. C. has risen. D. has been stable. E. has fallen to zero. Answer: C 54. All of the following are reasons for immigration to a foreign country, except that: A. the domestic country may be politically repressive. B. there is an abundance of employment opportunities in the domestic country. C. the domestic country is economically stagnant. D. there is no scope for upward mobility in the domestic country. E. there are religious prosecutions. Answer: B 55. The greatest number of recent immigrants to the U. S. come from Mexico because of: A. political insecurity in Mexico. B. religious insecurity in Mexico. C. proximity and wage differentials. D. racial discrimination in Mexico. E. greater social security in the United States. Answer: C 56. With illegal immigration the unskilled labor supply curve: A. shifts to the left. B. becomes perfectly inelastic. C. becomes perfectly elastic. D. shifts to the right. E. becomes non-existent. Answer: D 57. Which of the following is true of illegal immigrants? A. They help raise the unemployment rate of the United States. B. They take away jobs from Americans. C. They do not affect the equilibrium wage of the U. S. unskilled labor market. D. They help some firms lower operating costs, earn more profit, and produce more. E. They reduce the supply of unskilled labor in the United States. Answer: D 58. Which of the following are benefits created by the immigrants? A. Increase in educational expenditures on public schools for their children B. Increase in the wages of unskilled laborers C. Reduction in costs for some firms D. Increased expenditures on health care for illegal immigrants at emergency clinics and hospitals E. Increase in the wages of skilled workers Answer: C 59. Which of the following is not a cost of illegal immigration in the U. S. ? A. The adverse impact on unskilled workers B. The damage to national property caused during the process of immigration C. Additional expenditure on healthcare at emergency clinics and hospitals D. Expenditure on public education on the children of immigrants. E. Expenditure on employment insurance programs for the illegal immigrants. Answer: E 60. Which of the following is an impact of the restriction on immigration on the domestic firms? A. The domestic firms would produce more and reap greater profits. B. The domestic firms would hire more unskilled laborers at lower wages. C. The domestic firms would charge low prices for their products. D. The domestic firms would have to pay higher wages and make less profit. E. The domestic firms would make above normal profits in the long run. Answer: D 61. One of the major impacts of restricting immigration is that the: A. prices of the products produced by unskilled laborers will decline. B. prices of the products produced by unskilled labor will increase. C. supply of labor in agriculture will increase. D. supply of labor in the industrial sector will rise. E. government’s expenditure on education and health will rise. Answer: B 62. For economists, discrimination is difficult to rationalize because: A. it is costly to those who discriminate. B. the firms can actually reap greater profits by discriminating between their workers. C. in a freely functioning labor market, there is no such thing as discrimination. D. economists know that in the real world, personal prejudices do not exist. E. wages will not be allowed to fall below their natural equilibrium rate. Answer: A 63. Which of the following is an instance of employer prejudice that leads to wage differential? A. Employers attempting to hire workers based on their marginal productivities B. Employers attempting to hire only good looking female workers C. Workers attempting to work for only certain particular organizations D. Producers purchasing raw materials from selective suppliers E. Workers ready to work for any employer in the labor market Answer: B 64. Which of the following statements about employer prejudice is true? A. It would be impossible for employer prejudice to exist in a firm that sells its output in a competitive market unless all rivals also discriminate. B. Economic theory tells us that it would be impossible for employer prejudice to exist in a firm that is a monopoly. C. Employer prejudice will help a monopolist to increase his profits by satisfying his managers personal prejudices. D. Legislation has ended employer prejudice in the United States. E. Employer prejudice occurs only in low-paying jobs. Answer: A 65. When white males resist to share responsibilities with members of a minority group, it is termed as: A. employer prejudice. B. consumer prejudice C. worker prejudice. D. statistical discrimination. E. occupational segregation. Answer: C 66. When people prefer to obtain medical, or legal services from white males, although they charge high prices for their services, it is termed as: A. producer prejudice. B. employer prejudice. C. worker prejudice. D. occupational segregation. E. consumer prejudice. Answer: E 67. If employers have imperfect information about job applicants, it may be rational for them to use: A. employer prejudice. B. worker prejudice. C. consumer prejudice. D. statistical discrimination. E. occupational segregation. Answer: D 68. Reliance on indicators of productivity such as education, experience, and test scores may keep some very good people from getting a job and may result in hiring unproductive people. This is called: A. worker prejudice. B. statistical discrimination. C. crowding out. D. disparate treatment. E. comparable worth. Answer: B 69. Which of the following reasons will most likely explain why discrimination that is not related to personal prejudice can occur? A. A desire to avoid associating with certain groups of people B. A lack of communication skills of workers seeking jobs C. A lack of information D. A lack of proper technical expertise E. Too many people applying for the same job Answer: C 70. When people are separated into different jobs on the basis of sex, it is referred to as: A. statistical discrimination. B. employer prejudice. C. worker prejudice. D. occupational segregation. E. occupational crowding. Answer: D 71. Which of the following can result in occupational crowding? A. Illegal immigration B. Outsourcing of services C. Consumer prejudices, superstitions, and religious taboos D. Governmental policies and customs E. Statistical discrimination and imperfect information Answer: E 72. Which of the following is not a reason for the wage differential between females and males? A. The choice of major in college by females tends to be different than the choice by males. B. The existence of employer prejudice. C. The number of males is usually greater than the number of females in the labor force. D. Females bear the primary responsibility of childbearing. E. Women accept lower wages for flexible and shorter working hours. Answer: C 73. Which of the following statements best defines the economics of the so-called superstar effect in the labor market? A. This effect will result in cases in which individuals with large productivity differences receive vastly different compensation. B. This effect occurs in cases in which individuals with small productivity differences receive very small differences in compensation. C. This effect occurs when the firm hiring the superstar simply does not understand the term marginal-revenue product. D. This effect occurs in cases in which individuals with small productivity differences receive vastly different compensation. E. This effect usually occurs in industries in which a labor union has far-reaching powers. Answer: D 74. Disparate treatment refers to: A. the treatment of individuals on the basis of their race, sex, color, religion, or national origin. B. the treatment of individual workers on the basis of their opportunity costs. C. the treatment of individual workers on the basis of their marginal productivities. D. discriminatory treatment of the individuals due to lack of correct information. E. the discriminatory treatment of firms by the trade unions. Answer: A 75. The Civil Rights Act of 1964 in the United States led to _____. A. the introduction of the concept of discrimination. B. complete elimination discrimination from the labor force. C. creation of equal opportunities for men and women. D. creation of equal opportunities for the members of different races. E. establishment of a much clearer definition of discrimination. Answer: E 76. The concept of comparable worth: A. is that pay ought to be determined by job characteristics rather than by supply and demand. B. is that pay ought to be determined by supply and demand rather than by job characteristics. C. has made hiring practices much simpler for employers. D. asserts that market-determined wages are the only appropriate way in which to allocate pay. E. is easy to implement once a new worker has been hired. Answer: A 77. Which of the following determines comparable worth of a particular job? A. Cultural background of the applicants B. Gender of the candidates applying for a job C. Race of the applicants for the job D. Level of formal education required for a job E. National origin of the workers in a factory Answer: D 78. Proponents of comparable worth justifies it on the ground that: A. interfering with the functioning of the labor market will lead to shortages of labor. B. interfering with the functioning of the labor market will lead to excess supplies of labor. C. as a result of personal prejudices the market is unable to assess marginal products. D. market correctly processes the innumerable information which are available. E. interaction of demand and supply correctly determines the wage rate. Answer: C NARRBEGIN: Figure 15. 7 The following figures show the demand (D) and supply (S) curves of micro and macro economists. Figure 15. 7 NARREND 79. In Figure 15. 7, assume that the wage rates of the micro and the macro economists are determined by the aggregate demand and supply curves. The levels of employment for micro- and macro economists are _____ and _____ respectively: A. 100; 40. B. 100; 50. C. 90; 50. D. 100; 50. E. 110; 60 Answer: D 80. In Figure 15. 7, assume that micro- and macroeconomists must be paid the same because of comparable-worth laws. If the wage is $12, then: A. there is a shortage of macroeconomists and a surplus of microeconomists. B. there is a shortage of microeconomists and a surplus of macroeconomists. C. there is a shortage of both macroeconomists and microeconomists. D. there is a surplus of both macroeconomists and microeconomists. E. the labor market for economists as a whole is in equilibrium. Answer: A 81. The principal argument against comparable worth is that: A. men and women differ largely in terms of their productivities. B. market does not function correctly and leads to inefficient allocation of resources. C. market allocates scarce resources to their most highly valued uses in the most efficient manner. D. demand and supply do not allocate workers to where they are needed the most. E. legislation by the government are often appropriate as it processes all the available information correctly. Answer: C TRUE/FALSE 1. The quantity of labor supplied by a particular wage earner will always increase as long as the wage rate increases. Answer: False 2. An increase in the wage rate lowers the opportunity cost of leisure and induces people to enjoy more leisure. Answer: False 3. Since we all like to get richer, so when wage rate increases we always like to work longer hours to make more income. Answer: False 4. The labor-market-supply curve illustrates that, as the wage rate increases, the number of number of hours that each person is willing and able to work rises. Answer: True 5. If the quantity demanded for labor is more than the quantity supplied, there will be unemployment. Answer: False 6. Wage differentials exist because not all workers and all jobs are alike. Answer: True 7. A wage differential between skilled and unskilled workers exists because skilled workers have higher marginal products than unskilled workers. Answer: True 8. A compensating wage differential is a wage difference attributable to the difference in the marginal productivity of workers. Answer: False 9. An example of human capital is the purchase of a computer to help accountants. Answer: False 10. The greater the opportunity cost of any particular occupation, the smaller the number of people who will select that occupation. Answer: True 11. People tend to remain in those occupations that require continuous time and financial commitments to remain productive. Answer: False 12. Getting the work done by some other firm at lower costs, when the firm is situated in some other country is called outsourcing. Answer: False 13. Offshoring does not affect the percentage of U. S. workers employed in manufacturing. Answer: False 14. If the minimum wage is set above the equilibrium wage by the government, there is an excess supply of labor in the market. Answer: True 15. In a perfectly competitive labor market, the minimum wage policy adopted by the government raises employment. Answer: False 16. If an employer is a monopsonist, the imposition of a minimum wage set at a level that is less than the marginal revenue product but greater than the wage rate that the monopsonist wants to pay may actually increase the level of employment. Answer: True 17. The distortions created by income taxes could be minimized by changing the progressive tax system to a flat tax system. Answer: True 18. People leave their home country and go to another country to live primarily because they seek a higher quality of life. Answer: True 19. Illegal immigrants to the U. S. usually charge higher wages than their American counterparts. Answer: False 20. Because of illegal immigrants, the equilibrium wage rate of unskilled labor falls. Answer: True 21. Illegal immigrants pay social security tax. Therefore they receive social security benefits on retirement. Answer: False 22. Border enforcement if effective would raise the number of illegal immigrants into the United States. Answer: False 23. The principal argument against comparable worth is that the demand and supply of labor in the labor market allocates workers to where they are needed the most. Answer: True 24. From an economist’s viewpoint, discrimination occurs if there is a wage differential between two groups when there is no difference in the marginal revenue product of the two groups. Answer: True 25. Economic theory suggests that the consumer-prejudice explanation for discrimination means that consumers will have to pay more to be served by employees of a specific group. Answer: True 26. It is often profitable for the white-males to accept lower paying positions to avoid working with women. Answer: False 27. Sometimes the only information that is available with the employers when they hire someone is information that may be imperfectly related to productivity in general and may not apply to a particular person at all. Answer: True 28. The wage gap between males and females is decreasing, and will be finally eradicated because the average male in the labor force has equal marketable human capital as the average female. Answer: False 29. In 2001, Alex Rodriguez, a baseball player, was given a contract paying about $25 million per year. This contract was significantly higher than that of any other player in baseball. One explanation for “A-Rod” receiving such high compensation is the superstar effect. Answer: True 30. When women and members of other minority groups are forced into occupations where they are unable to obtain the human capital necessary to compete for high paying jobs, it is termed as statistical discrimination. Answer: False 31. It has been proved empirically that marriage and children lowers a woman’s ability to earn as much as a man. Answer: True 32. Statistical discrimination is legal under the disparate impact standard but illegal under the treatment standard. Answer: False 33. The idea of comparable worth implies that wages are to be determined by the job characteristics and not merely by the interaction of demand and supply. Answer: True 34. A firm employing secretaries and steelworkers should ideally pay equal wages to both the groups of workers irrespective of the type of job each group does. Answer: False 35. Supporters of comparable worth claim that market correctly allocates the workers in their best paid works. Answer: False 36. The policy of comparable worth has been more successful in the public sector than in the private sector. Answer: True Chapter 16 Capital Markets MULTIPLE CHOICE 1. A firm decides to hire more equipments if: A. the average revenue it earns by selling its output is equal to its average cost. B. its total revenue is greater than the total cost of hiring the equipments. C. the marginal revenue product of the additional unit of capital is greater than the marginal factor cost. D. its average revenue is greater than the average cost of hiring equipments. E. the price of its product is greater than the average cost of production. Answer: C 2. The demand curve for capital: A. shows the positive relation between capital usage and the quantity of capital demanded. B. shows the positive relation between aggregate output and the quantity of capital demanded. C. shows the negative relation between rate of inflation and the quantity of capital demanded. D. shows the positive relation between technological change and the quantity of capital demanded. E. shows the negative relation between price of capital and the quantity of capital demanded. Answer: E 3. When a new generation of computers that are faster and more powerful than the previous generation are introduced into the resource market: A. many firms do not change their demand for capital. B. many firms increase their demand for capital. C. many firms decrease their demand for capital. D. the quantity demanded of capital declines. E. the quantity demanded of capital increases. Answer: B 4. When the rate of interest rises, the resulting change in the demand for capital is shown graphically by: A. a movement down along the demand curve. B. a rightward shift of the demand curve. C. a leftward shift of the demand curve. D. a movement up along the demand curve. E. an outward rotation of the demand curve. Answer: C 5. All of the following will shift the demand curve for capital, except: A. future expectations about the demand for the good produced by a firm. B. technological changes. C. the price of capital. D. the entry of new firms into the market. E. the change in the interest rate. Answer: C 6. If the price of capital falls: A. the supply of capital increases. B. the quantity supplied of capital decreases. C. the quantity supplied of capital increases. D. the quantity supplied of capital remains unchanged. E. the supply of capital decreases. Answer: B NARRBEGIN: Figure 16. 1 The figure given below shows the demand curves [D1 and D2] and the supply curve [S1] of capital. Figure 16. 1 NARREND 7. In Figure 16. 1, if the initial demand curve is D1, the capital market is in equilibrium at: A. point a. B. point b. C. point c. D. point d. E. point f. Answer: C 8. In Figure 16. 1, if the initial demand curve is D1, the equilibrium price of capital is: A. P2. B. P4. C. P1. D. P5. E. P3. Answer: A 9. In Figure 16. 1, if the initial demand curve is D1, the equilibrium quantity of capital demanded is: A. Q1. B. Q3. C. 0. D. Q4. E. Q2. Answer: E 10. In Figure 16. 1, if the price set in the market is P3 when the demand curve is D1, then: A. the market will be in equilibrium. B. there will be an excess demand for capital of the amount Q4 - Q1. C. there will be a shortage of capital in the market by the amount Q4 - Q2. D. there will be a surplus of capital in the market by the amount Q3 - Q1. E. there will be a surplus of capital in the market by the amount Q3 - Q2. Answer: D 11. In Figure 16. 1, if the demand curve for capital shifts to D2, the equilibrium price and quantity of capital are: A. P1 and Q1. B. P2 and Q2. C. P5 and Q1. D. P3 and Q3. E. P4 and Q4. Answer: E 12. Stocks that offer a guaranteed fixed periodic payment or dividend are known as: A. common stock. B. restricted stock. C. close-ended stock. D. preferred stock. E. open-ended stock. Answer: D 13. What is the main difference between common and preferred stocks? A. Common stocks pay interest whereas preferred stocks pay dividends. B. Preferred stocks carry voting rights whereas common stocks do not carry voting rights. C. Preferred stocks pay a guaranteed dividend, while common stocks may or may not pay dividends. D. In case of bankruptcy, preferred stockholders have a right to the company’s asset, whereas common stockholders do not have such rights. E. Common stocks can be converted into preferred stocks while preferred stocks cannot be converted into common stocks. Answer: C 14. The largest stock exchange in the world is: A. the Munich Stock Exchange. B. the London Stock Exchange. C. the New York Stock Exchange. D. the Tokyo Stock Exchange. E. the Shanghai Stock Exchange. Answer: C 15. The unique alphabetic name that identifies a listed stock is known as the: A. stock’s nickname. B. stock’s alpha sign. C. ticker symbol. D. alternative name. E. fixed call number. Answer: C 16. Dividend yield is: A. the annual dividend payment per share. B. the annual dividend per share divided by the price of each share. C. the current stock price divided by the dividend per share. D. the year-on-year change in the annual dividend payment. E. the dollar value change in the stock price from the previous day’s closing price. Answer: B 17. If the P/E ratio is equal to 50, it implies that investors in the stock are willing to pay: A. $25 for every $2 of the earnings that the company generates during a period. B. $100 for every $1 of the earnings that the company generates during a period. C. $500 for every $1 of the earnings that the company generates during a period. D. $50 for every $1 of the earnings that the company generates during a period. E. $5 for every $1 of the earnings that the company generates during a period. Answer: D 18. A stock index measures the: A. change in dividend payments of a group of stocks. B. fluctuation in the price earning ratio of each share. C. change in the trading volume in the stock exchange. D. price movements of a group of stocks. E. change in the number of enlisted companies. Answer: D 19. The product of the stock price and the total outstanding shares of that stock are referred to as: A. market capitalization. B. floating capital. C. book value. D. financial value. E. face value. Answer: A 20. Most stock indexes use which of the following measures to weight the companies that participate in the index? A. The company's sales volume B. The company's book value C. The current profits D. The available cash E. The market capitalization Answer: E 21. Which of the following indexes includes the stocks of 500 companies that are widely owned and that represent all sectors of the U. S. economy? A. Standard & Poor’s 500 B. Dow Jones Industrial Average C. BSE Sensex D. Mid-Cap-50 E. NSE 20 Share Index Answer: A 22. Which of the following measures the performance of smaller stocks in the United States? A. S&P 500 B. NASDAQ Composite C. Wilshire 5000 D. Russell 2000 E. Goldman Sachs Indices Answer: D 23. Which of the following is true of the NASDAQ Composite Index? A. It includes stocks of 500 companies that are widely owned by U. S. citizens. B. It represent all major areas of the U. S. economy. C. It includes mostly the stocks technology and Internet related companies. D. It contains more than 6,500 stocks that trade in the United States. E. It includes all of the stocks on the New York Stock Exchange. Answer: C 24. A group of stocks of individual firms that are placed into one investment pool by an investment company is commonly known as a: A. pooled stock venue. B. stock clump. C. stock agreement. D. mutual fund. E. maximal diversified investment (MDI). Answer: D 25. Mutual funds that are composed of corporate and government bonds are known as: A. risk-adjusted funds. B. global funds. C. equity funds. D. fixed-income funds. E. money market funds. Answer: D 26. Mutual funds that invest only in companies that meet certain criteria and usually exclude companies that produce tobacco, weapons, or alcoholic beverages are known as: A. socially responsible funds. B. global funds. C. equity funds. D. fixed-income funds. E. money market funds. Answer: A 27. Mutual funds that attempt to mimic the performance of a broad market index, such as the Dow Jones Industrial Average, are known as: A. socially responsible funds. B. index funds. C. equity funds. D. fixed-income funds. E. money market funds. Answer: B 28. Fees paid to the mutual fund manager are called: A. fund fees. B. service fees. C. load. D. dividends. E. agency fees. Answer: C 29. A mutual fund for which a fee is paid at the time of purchase is a: A. no-load fund. B. face-end load fund. C. back-end load fund. D. fixed-end fund. E. front-end load fund. Answer: E 30. Compute the actual investment in a mutual fund carrying a front-end load of 10 percent on a sum of $10,000 invested by an individual. A. $1,000 B. $10,000 C. $11,000 D. $9,000 E. $12,000 Answer: D 31. Consider a mutual fund with a 6 percent back-end load that decreases to 0 percent in the seventh year. How much of the load will an investor have to bear if she sells it off in the second year? A. 4 percent of the load B. 3 percent of the load C. 6 percent of the load D. 5 percent of the load E. 2 percent of the load Answer: D 32. Consider a mutual fund with a 6 percent back-end load that decreases to 0 percent in the seventh year. How much of the load will an investor have to bear if she sells it off in the seventh year? A. 1 percent of the load B. 0 percent of the load C. 2 percent of the load D. 6 percent of the load E. 4 percent of the load Answer: B 33. NAVPS in the mutual fund table denotes: A. the percentage change in the asset value of the mutual fund from the close of the previous day's trading. B. the highest and lowest values that the mutual fund has experienced over the last one year. C. the highest asset value at which the fund was sold during the past week. D. percentage change in the asset value of the mutual fund from the previous week. E. the value of the mutual fund divided by the number of shares of the fund. Answer: E 34. If people expect the price of a stock to rise in future, the demand curve for the stock: A. becomes positively sloped. B. shifts to the right. C. becomes horizontal. D. becomes vertical. E. shifts to the left. Answer: B 35. The possible returns to a share holder are: A. rent and capital gain. B. fixed interest and dividend. C. fixed interest and capital gain. D. rent and fixed interest. E. dividend and capital gain. Answer: E 36. If the current shareholders begin to believe that the prices of the stocks are likely to rise in future, the supply curve of shares will: A. shift to the right. B. become perfectly elastic. C. slope downward. D. shift to the left. E. become perfectly inelastic. Answer: D 37. Which of the following factors affects the quantity demanded of a company’s stock? A. The prices of other companies’ stocks B. The price of the company’s stock C. The returns on other possible investments D. Expectations regarding stock price movements E. Income of the investors Answer: B 38. An investment that has the same features, such as risk and ease of selling, as the investment being considered is referred to as a(n): A. equivalent investment. B. comparable investment. C. twin investment. D. dual investment. E. duplication investment. Answer: B 39. The amount that a risk averse person requires to take on risk is called: A. risk arbitrage. B. risk bonus. C. risk premium. D. risk capital. E. risk rate. Answer: C 40. A pervasive tradeoff in financial markets relates risk to expected returns. Which of the following statements reflects this relationship? A. The higher the risk of an asset, the lower the expected return on the asset. B. There is usually no relationship between risk and return. C. The higher the risk of an asset, the higher the expected return on the asset. D. The return on an asset is normally positively related to the risk of comparable assets. E. The return on a risky asset cannot be compared with the return on a risk free asset. Answer: C 41. Risk is typically measured: A. by comparing the size of a firm to other firms operating in the market. B. by looking at the economic profit that a firm has earned in the past few years. C. by determining whether the bonds issued by a firm are of high or low value. D. by comparing how much the stock price fluctuates compared with an average firm. E. by comparing how much the price of the bond falls whenever the price of a firm’s product rises. Answer: D 42. Shane holds wealth worth $10,000. He considers investing it equally in two gambles one of which has a probability of 0. 6 to yield a return of 10% and the other has a probability of 0. 4 to yield a return of 20%. What will be Shane’s total expected return from the two gambles? A. $1,000 B. $700 C. $500 D. $900 E. $1,100 Answer: B 43. If the earnings report of a firm indicates higher earnings than was expected by the investors: A. the stock prices of the firm will decline. B. the price of the product produced by this firm will decline. C. the price of the product produced by this firm will rise. D. the firm will spend more on advertising. E. the stock prices of this firm will increase. Answer: E 44. The price of stock is determined by: A. the demand for the good produced by the firm. B. the number of shares of a firm’s stock that is available. C. the performance of the stock market. D. the performance of the Federal Reserve. E. the demand for and supply of a company’s shares. Answer: E NARRBEGIN: Figure 16. 2 The figure given below shows the demand [D and D’] and supply [S and S’] curves of shares of stock. Figure 16. 2 NARREND 45. According to Figure 16. 2, what sort of change in the market environment would increase the supply of stocks from S to S’ and decrease the demand from D to D’? A. A perceived increase in the firms’ expected future profits B. A new perception that the economy is about to enter a period of expansion C. News revealing that stocks prices will increase in the future D. News that the economy is likely go into a recession soon E. A perceived improvement in the firms’ performance compared to the last year Answer: D 46. According to Figure 16. 2, what will be a necessary result of a simultaneous increase in the supply of stocks from S to S’ and decrease in the demand from D to D’? A. A decrease in the price of the shares B. An increase in the price of the shares C. An increase in the amount of shares offered for sale D. An increase in the volatility of the share E. A decrease in the profits earned by the firms Answer: A 47. Why is it unlikely for even a very successful investor to continuously outperform the market? A. Different investors have different risk appetites. B. Individual investors have independent strategies. C. The stock market is not subject to sufficient government regulations. D. Investors often mimic the strategies of the successful investor. E. The market is always inefficient. Answer: D 48. A bubble or panic generally occurs in the stock market because of: A. upswings in the business cycle. B. expansionary monetary policies undertaken by the government. C. irrational, or abnormal forecasts, or market valuations. D. an increase in the profitability of the firms. E. deliberate government actions to control inflation. Answer: C 49. The price of Amazon. com stock was very high in the 1990s although the company never earned an economic profit. This demonstrates that: A. investors’ expectations of future profits alone influence the stock prices. B. the performance of a firm has no bearing on stock prices. C. stock markets are highly inefficient because investors vary in their risk appetites. D. speculation based on wishful thinking by investors have a bearing on the stock prices. E. investor expectations are generally rational. Answer: D 50. Buying a newly issued bond implies: A. borrowing money from a private bank. B. taking over the ownership of a firm. C. lending money to a firm. D. paying the price for a service rendered by a firm. E. borrowing funds from international organizations. Answer: C 51. The maturity date of a bond is: A. the date on which the lender receives the coupon from the borrower. B. the date on which the borrower takes the loan. C. the date on which the bond is bought by an individual from the firm. D. the specified time when the borrower repays the loan. E. the specified time when the borrower sells the bond held by him to someone else. Answer: D 52. The fixed amount that the issuer of a bond agrees to pay the bondholder each year until the bond matures is called: A. rent. B. coupon. C. interest. D. load. E. dividend. Answer: B 53. The face value of a bond is: A. the amount of the coupon that is paid at equal intervals. B. the amount repaid to the lender on maturity. C. the percentage of company profits that is paid to the borrower. D. equivalent to the capital gain. E. equivalent to economic profit. Answer: B 54. Which of the following is sometimes used as a synonym to describe a bond? A. Stock B. Fixed-income security C. Capital asset D. Retained earning E. Depreciation Answer: B 55. A bond with a par value of $1,000 is traded at $1,500. The coupon rate offered on the bond is 10 percent. The bond matures after a period of 5 years . The coupon paid to the bond holder after the end of the first year is: A. $150. B. $100. C. $200. D. $50. E. $250 Answer: B 56. Which of the following names is given to the corporate bonds that carry the maximum risk? A. Risky-time bonds B. Failure bonds C. Revelation bonds D. Blue-chip bonds E. Junk bonds Answer: E 57. The U. S. government bonds are likely to be less risky because: A. the government always runs a balanced budget. B. the government bonds are backed by gold. C. the government can raise taxes to redeem the bonds at maturity. D. the government has limited liability to repay. E. the government always has an excess reserve of foreign exchange. Answer: C 58. Why are bonds less risky than stocks? A. Dividend given on shares are usually less than the coupon-rate on bonds. B. Bonds can be issued only by the government whereas shares are issued by private firms. C. Bondholders have a claim on the assets of the firm whereas the shareholders do not. D. Shareholders are entitled to a share of company’s earnings. E. The higher the profit of the firm, the greater the share of the bondholders. Answer: C 59. According to the ratings given by Moody’s and Standard and Poor’s, _____ bonds are corporate bonds that carry the lowest risk and offer a lower yield. A. A+ B. white collar C. AA D. blue chip E. AA+ Answer: D 60. Which of the following describes the relationship between bond prices and bond yields? A. There is a positive relationship between the yield and the price. B. Every 1% increase in the bond price results in a 2% increase in the yield. C. When the bond price is greater than the annual interest, yield is greater than one. D. Bond price divided by the bid price is equal to the yield. E. There is an inverse relationship between the yield and the price. Answer: E 61. Notes are debt securities which have a maturity period of: A. 0-5 years. B. 10-15 years. C. 0-1 year. D. 10-20 years. E. 1-10 years. Answer: E 62. A bond that provides no interest payments but instead is issued at a value that is lower than its face value is called: A. a no-interest bond. B. a load-free bond. C. a no-load bond. D. a zero-coupon bond. E. a coupon bond. Answer: D 63. Yield on a bond refers to: A. the coupon-rate of the bond. B. the money earned by selling a bond. C. the return from a bond after its maturity. D. the difference between the face value of a bond and the bond price. E. the annual return until the bond matures. Answer: E 64. If the par value of a bond is $200, and the bid price of the bond is $90, it implies: A. the bond is sold at $110. B. the bond was bought at $110. C. the bond is trading at a discount of 10 percent of its par value. D. the bond is trading at 45 percent of its par value. E. the bond is trading at a premium of 15 percent. Answer: D 65. A bond with a par value of $1,000 is traded at $2,000. The interest rate offered on the bond is 10 percent per annum. The bond matures after a period of 5 years. The yield from the bond is: A. 5 percent. B. 10 percent. C. 20 percent. D. 15 percent. E. 2. 5 percent. Answer: A 66. If the coupon-rate of a particular bond increases: A. the supply of the bond increases. B. the price of the bond declines. C. the demand for the bond declines. D. the supply of the bond decreases. E. the demand for the bond increases. Answer: E 67. If bonds and stocks are considered to be substitute goods, and the investors expect stock prices to drop in recent future: A. the price of bonds will also decline. B. the supply of bond will increase. C. the interest rate on bonds will decline. D. the demand for stocks will increase. E. the demand for bonds will decline. Answer: C 68. When the price of a stock rises significantly higher than that can be justified by the dividends the firm can be expected to pay in future, a(n) _____ is said to have occurred. A. stock market crash B. arbitrage C. stock market bubble D. bull run E. short sale Answer: C 69. If $30 is paid for a share of stock and the earning per share is $3, how long will it take for the firm’s earnings to add up to the purchase price? A. 30 years B. 3 years C. 27 years D. 10 years E. 90 years Answer: D 70. During the stock market bubbles, the price/earnings [P/E] ratio: A. hits high levels. B. falls to zero. C. becomes negative. D. remains constant. E. declines to a very low level. Answer: A 71. Which of the following factors lead to a drastic rise in the price of assets? A. Increased supply of assets B. Increase in the market rate of interest C. Reduced demand for money. D. Increased liquidity in the economy. E. Contractionary monetary and fiscal policies being undertaken by the government Answer: D 72. Which of the following factors led to the housing bubble in the U. S. in 2006? A. Increased amount of lending to subprime borrowers B. Decreased money supply by Federal Reserve C. Future expectation about downward movement of prices of the houses D. Federal Reserve raised the market rate of interest E. Increase in the supply of houses Answer: A TRUE/FALSE 1. The quantity of capital demanded changes when one of the nonprice determinants of demand change. Answer: False 2. As the price of capital falls, the quantity of capital that producers are willing and able to offer falls. Answer: True 3. A decline in the interest rate will lead to an increase in the price of capital, supply of capital remaining constant. Answer: True 4. If both demand for and supply of capital increases by equal amounts, then the equilibrium price of capital goes up, and the equilibrium quantity of capital increases. Answer: False 5. The capital market is a market in which financial capital is acquired. Answer: False 6. Although technically owning a share means the shareholder holds a share of everything that the firm owns but in actuality he is only entitled to a share of the company’s earnings. Answer: True 7. A low P/E ratio of a stock means that the company issuing the stock is headed to trouble in near future. Answer: True 8. The S&P 500 index includes the stocks of 500 largest companies in the U. S. Answer: False 9. Index mutual funds purchase shares of stock in those companies which are included in the market based indexes. Answer: True 10. If a mutual fund with a back-end-load is not sold within the stipulated time period, the investor is not required to pay any fee to the fund manager. Answer: True 11. The column ‘Close’ in the mutual fund table indicates the lowest asset value at which the fund was sold at the end of the last week. Answer: False 12. The demand curve for the shares of a company’s stock slopes upward, since the higher the price of the stock, everything else the same, the higher the quantity of stock demanded. Answer: False 13. A primary market refers to a market in which outstanding shares are bought and sold. Answer: False 14. If the price of company’s stock is expected to fall in the future, then people holding such shares will have an incentive to get rid of them. Answer: True 15. In order to induce risk averse people to invest in risky ventures, an additional sum of money is often paid to them along with the return. Answer: True 16. If the number of people who want to sell of stocks are higher than those who want to buy it, the stock prices move up. Answer: False 17. The equity market is said to be an efficient market because it is difficult for an investor to continually earn above-normal profits. Answer: True 18. The phrase, “Google stock soared Friday, continuing Wall Street’s love affair with the company,” implies that Google’s earnings were much more than it was expected in that quarter. Answer: True 19. If the earnings of Chopo Co. are lower than expected, the forecasts will be revised downward and the price of the company’s stock will decline. Answer: True 20. Stock prices often fail to correctly reflect complete information about a company in the long run. Answer: False 21. When you purchase a bond in the secondary market, you are lending money directly to the borrower. Answer: False 22. Corporations can attract more lenders by offering a lower coupon on their bonds than the government bonds. Answer: False 23. Bonds are debt securities maturing within 10 years. Answer: False 24. Bonds and stocks act as complementary goods such that a rise in the price of one raises the demand for the other. Answer: False 25. When the interest rate on the alternative investments rise, it becomes costly for the bondholders to retain their bonds with them. Answer: True 26. An investor who wants to diversify his portfolio will buy only bonds when both stocks and bonds are expected to yield better returns. Answer: False 27. When a price rise of an asset can be justified by fundamental concepts and past experiences, then such a price rise does not constitute a classic bubble. Answer: True 28. The housing bubble experienced in 2006 in the U. S. was exhibited by the extraordinary rise in the ratio of prices of houses to rents on houses. Answer: True Test Bank for Microeconomics William Boyes, Michael Melvin 9781111826154

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