No Free Lunch: Economics for a Fallen World: Third Edition, Revised

Chapter Sixteen: Valuing the Future - Concepts in Capital & Finance 415 CHAPTER SIXTEEN: QUESTIONS FOR REVIEW THE FOLLOWING QUESTIONS ARE TRUE OR FALSE 1. The Law of Jubilee was intended to prevent income inequality by forcing purchasers of land to give it back to the original owners. 2. Production occurring in time means that new knowledge is necessarily gained during the production process. 3. A tractor is always a capital good. 4. When an economist speaks of the heterogeneity of capital, he/she means that we have different types of capital that can all be used to satisfy the same economic function. 5. The best entrepreneurial plans will be well thought out such that there is no need to change the plans once initiated. 6. Malinvestment is when entrepreneurs invest too much, creating too much capital in an economy. 7. There is an optimal investment strategy for an entrepreneur. THE FOLLOWING QUESTIONS ARE SHORT ANSWER OR CALCULATION 8. What does it mean to discount the future? 9. The Rule of 72 provides a quick way to determine how long it will take you to double your money. If you need to double your money in 6 years, what annual rate of return do you need on your investment? 10. What is the fundamental value of any asset? 11. Why do lower interest rates drive investment spending towards longer-lived capital assets? 12. How does the fact that entrepreneurs face an uncertain future (as opposed to a risky future) affect their valuations of the future? 13. Why do our financial calculations nevertheless use risk (such as considering a risk premium in the interest rate)?