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

Suppose a firm is considering locating a manufacturing facility in a poorer country where wage rates are much lower than in the United States. Why would social capital be a factor in their decision to relocate? Explain in terms of the impact that a lack of social capital may have on the marginal revenue product

Up to which point will a perfectly competitive firm continue to invest? Explain carefully.

Is each of the following situations an example of savings, investment, or neither? In each case explain your choice. (a) A savings and loan association lends money for the purchase of "junk" (not backed) bonds. (b) John's income is $25,000 per year; $22,000 is spent on consumer goods and the remaining money is used purchase stock in the local electric company. (c) Just before retirement a couple sells their shares of Pacific Bell stock and puts the proceeds in a bank savings account. (d) The city of Los Angeles rebuilds highways after an earthquake. (e) In order to improve the income earning potential of current welfare recipients, the federal government increases the size of income transfers.

Suppose that you and two friends have an opportunity to purchase a pizza restaurant. Each of you would put up $75,000. The revenue from the restaurant is expected to remain $200,000 per year for the next several years. The costs (not including the opportunity costs of your investment) of operating the restaurant are expected to remain steady at $185,000 for the next several years. The current market rate of interest is 7 percent per year. Should you go in on this deal? Explain.

Suppose that you are an analyst working for a venture capital firm. An individual contacts you about backing his brand new Internet company. What information would you want before making this decision?

Explain why a computer might depreciate rapidly just in one year even if it is in just as good of a condition as the day it was purchased?