Econ 101 - Microeconomics » Summer 2021 » Chapter 1 Application Exam Part 1
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Question #1
Suppose that we are analyzing the scenario where Beyonce and Jay-Z pay the house off and have no mortgage and we need to ascertain the MB and MC associated with the no mortgage scenario. The following information is provided: MB(No Mortgage) = (What they are willing to pay for the home) = ? MC(No Mortgage) = (Cost of the home) = ? Questions: What is the MB(No Mortgage) and MC(No Mortgage) ?
A.
MB(No Mortgage) = $100 million; MC(No Mortgage) = $86 million
B.
MB(No Mortgage) = $104 million; MC(No Mortgage) = $96.8 million
C.
MB(No Mortgage) = $100 million; MC(No Mortgage) = $88 million
D.
MB(No Mortgage) = $88 million; MC(No Mortgage) = $100 million
Question #2
Suppose that we are again analyzing the scenario where Jay-Z and Beyonce pay the house off and have no mortgage. The following information is provided: Accounting Net Benefit(No Mortgage) = MB(No Mortgage) – MC(No Mortgage) = ? Question: What is the Accounting Net Benefit(No Mortgage) ?
A.
Accounting Net Benefit(No Mortgage) = $108.8 million- $100 million= $8.8 million
B.
Accounting Net Benefit(No Mortgage) = $104 million- $96.8 million= $7.2 million
C.
Accounting Net Benefit(No Mortgage) = $88 million- $88 million= $0
D.
Accounting Net Benefit(No Mortgage) = $100 million- $88 million= $12 million
Question #3
Suppose that we are now analyzing the scenario where Jay-Z and Beyonce don't pay the house off and take out a mortgage and we need to ascertain the MB and MC associated with the mortgage scenario. The following information is provided: MB( Mortgage) = (What they are willing to pay for the home) + (Expected amount earned in the stock market) = ? MC(Mortgage) = (Cost of the home) + (Mortgage interest paid over the year) = ? Questions: What is the MB(Mortgage) and MC(Mortgage) ?
A.
MB(Mortgage) = $108.8 million; MC(Mortgage) = $88 million
B.
MB(Mortgage) = $88 million; MC(Mortgage) = $91.52 million
C.
MB(Mortgage) = $91.52 million; MC(Mortgage) = $91.52 million
D.
MB(Mortgage) = $108.8 million; MC(Mortgage) = $91.52 million
Question #4
Suppose that we are again analyzing the scenario where Beyonce and Jay-Z don't pay the house off and and take out a mortgage. The following information is provided: Accounting Net Benefit(Mortgage) = MB(Mortgage) – MC(Mortgage) = ? Question: What is the Accounting Net Benefit(Mortgage) ?
A.
Accounting Net Benefit(Mortgage) = $108.8 million- $91.52 million= $17.28 million
B.
Accounting Net Benefit(Mortgage) = $91.52- $91.52 million= $0
C.
Accounting Net Benefit(Mortgage) = $108.8 million- $88 million= $20.8 million
D.
Accounting Net Benefit(Mortgage) = $88 million- $91.52 million= $-3.52 million
Question #5
Suppose that we now want to analyze the scenario where Beyonce and Jay-Z pay the house off and have no mortgage. We are provided the following information: Economic Net Benefit(No Mortgage) = Accounting Net Benefit(No Mortgage) – Accounting Net Benefit(Mortgage) = ? Question: What is the Economic Net Benefit(No Mortgage) ?
A.
Economic Net Benefit(No Mortgage)=$100 million-$88 million=$12 million
B.
Economic Net Benefit(No Mortgage)=$12 million-$17.28 million=$-5.28 million
C.
Economic Net Benefit(No Mortgage)=$7.2 million-$0 million=$7.2 million
D.
Economic Net Benefit(No Mortgage)=$8.8 million-(-$3.52) million=$12.32 million
Question #6
Suppose that we now want to analyze the scenario where Beyonce and Jay-Z don't pay the house off and have a mortgage. We are provided the following information: Economic Net Benefit(Mortgage) = Accounting Net Benefit(Mortgage) – Accounting Net Benefit(No Mortgage) Question: What is the Economic Net Benefit(Mortgage) ?
A.
What is the Economic Net Benefit(Mortgage)= $7.28 million-$3.56 million= $3.72 million
B.
What is the Economic Net Benefit(Mortgage)=$20.8 million- $0= $20.8 million
C.
What is the Economic Net Benefit(Mortgage)=$17.28-$12 million= $5.28 million
D.
What is the Economic Net Benefit(Mortgage)= $88 million-$100 million= -$12 million
Question #7
Which scenario has a positive accounting net benefit?
A.
Both have a negative accounting net benefit
B.
The Mortgage Scenario has a negative accounting net benefit, but the No Mortgage Scenario has a positive accounting net benefit
C.
Both scenarios have a positive accounting net benefit
D.
The No Mortgage Scenario has a positive accounting net benefit, but the Mortgage scenario has a negative accounting net benefit
Question #8
If Beyonce and Jay-Z decide to go with the “No Mortgage” scenario and pay the house off, what is the opportunity cost? (Name it and provide the amount)
A.
Accounting Net Benefit(Mortgage)= $17.28 million
B.
Accounting Net Benefit(Mortgage)= $5.28 million
C.
Accounting Net Benefit(No Mortgage)=$17.28 million
D.
None of the available answers
Question #9
If Jay-Z and Beyonce decide to go with the “Mortgage” scenario, and take out a loan, what is the opportunity cost? (Name it and provide the amount)
A.
Accounting Net Benefit(No Mortgage) = $0 million
B.
Accounting Net Benefit(No Mortgage)=$8.8 million
C.
Accounting Net Benefit(No Mortgage) = $12 million
D.
Accounting Net Benefit(No Mortgage) = $7.28 million
Question #10
Which scenario has a positive economic profit?
A.
Mortgage Scenario
B.
None of the scenarios have a positive economic profit
C.
Both of the scenarios have a positive economic profit
D.
No Mortgage Scenario
Question #11
What is the amount of the economic profit?
A.
$13.6 million
B.
$17.28 million
C.
$5.28 million
D.
$0
Question #12
Which scenario should Beyoncé and Jay-Z choose? Why?
A.
They should choose the mortgage scenario. This is because the Economic Net Benefit(Mortgage)= $17.28 million, which means that they will gain an additional $17.28 million if they take out a mortgage versus paying the house off.
B.
They should choose the mortgage scenario. This is because the Economic Net Benefit(Mortgage)= $5.28 million, which means that they will gain an additional $5.28 million if they take out a mortgage versus paying the house off.
C.
None of the available answers
D.
They should choose the no mortgage scenario. This is because the Economic Net Benefit(No Mortgage)= -$5.28 million, which means that they will gain an additional $5.28 million if they pay the house off versus taking a mortgage.
Question #13
What is the percentage point difference (spread) between the expected return in the stock market and the mortgage interest rate? Note: Spread= (expected return in the stock market) - (mortgage interest rate)
A.
Spread= 11%-3%= 8%
B.
Spread= 11%-4%= 7%
C.
Spread= 10%-4%= 6%
D.
Spread= 10%-5%= 5%
Question #14
Now multiply the percentage point difference (spread) times the cost of the house. What figure do you get?
A.
(Spread) x (Cost of Home)= .05 x $100 million = $5.0 million
B.
(Spread) x (Cost of Home)= .07 x $88million = $6.16 million
C.
(Spread) x (Cost of Home)= .06 x $88million = $5.28 million
D.
(Spread) x (Cost of Home)= .08 x $100million = $8 million
Question #15
What do you think is causing the Economic Net Benefit(Mortgage) to be positive?
A.
The percentage point difference (spread) between the expected return in the stock market and the mortgage interest rate.
B.
None of the available answers
C.
The difference between the Accounting Net Benefit(Mortgage) and the MB(Mortgage).
D.
The difference between the Accounting Net Benefit(No Mortgage) and the MB(Mortgage).
Question #16
Is there any risk involved in taking out a mortgage, which could cause the Economic Net Benefit(Mortgage) to be less than predicted or even negative? Why?
A.
None of the available answers
B.
There is risk in taking out a mortgage. The 10% expected return in the stock market is not guaranteed, and the return could end up being less than the mortgage interest rate. This would cause the spread to become negative, which would cause the Economic Net Benefit(Mortgage) to become negative.
C.
No, there is no risk because the expected return in the stock market is guaranteed.
D.
There is risk because the mortgage interest rate could unexpectedly increase. This would cause the spread to become negative, which would cause the Economic Net Benefit(Mortgage) to become negative.
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