Suppose a company borrows $10 million for a year at an interest rate of 6 percent annually, with all interest and principal to be paid at the end of the year.

1. Suppose a company borrows $10 million for a year at an interest rate of 6 percent annually, with all interest and principal to be paid at the end of the year.
   • a) How much money will the company give the lender at the end of the year?

$ 10,000,000. X 6% = $ 600,000. interest

• b) How much is the principal, and how much is the interest payment?

$ 600,000. interest + $ 10,000,000. principal = Total at end of year = $10,600,000.

2. Are the following statements true or false?
   • a) Venture capital goes to established companies such as General Motors and Procter & Gamble.
     false
   • b) Venture capital is a high-risk investment.
     True
   • c) The suppliers of capital in the venture capital are ordinary individuals.
     false
   • d) Venture capital firms expect that most of the companies they invest in will be big successes.
     false
   • e) The venture capital helps accelerate the adoption of new technology.
     True

3. Suppose the quality of U.S.-made bulldozers declined. How would this change impact the following?
   • a) The supply curve for imported bulldozers to shift to the left, shift to the right, or stay the same?
     False
   • b) The demand curve for imported bulldozers to shift to the left, shift to the right, or stay the same?
     True
   • c) The quantity of imports to rise, fall, or stay the same?
     False
4. Suppose that because of climate or some other reason, Country A’s wheat farmers have higher productivity than Country B’s wheat farmers. That is, on the same size farm, Country A can grow twice as much wheat as Country B with the same amount of labor.
   • a) Is this an example of absolute advantage or comparative advantage? Explain.
     Yes, it is an example of absolute advantage because country A can produce more with the same resources as country B.
   • b) Does this mean Country A will necessarily export wheat to Country B? Explain.
     Not necessarily, Transportation costs could disappear the productivity advantage. Also, if A makes some other product 4 times as well, it is better off producing more of the other product and letting B produce wheat, which would then be called a comparative advantage for B.
5. Say whether each of the following is mainly a productivity-enhancing innovation, a creation of new goods and services, or a quality-of-life innovation. Explain.
   • a) A car that emits less pollution.
     This is a quality of life enhancement because we enjoy the same product which is a car, while we get to reduce the pollution in the world.
   • b) A car that uses less gasoline.
     This is a productivity enhancement because we are using the same product which is a car, while we get to spend less gas in order to travel the same distance.
   • c) A drug that cures lung cancer.
     This is a a creation of new goods and services because we are using a new product for the first time that will provide us with a newly innovated results.
   • d) A teleportation device that can move you instantaneously from one spot to another.
     This is a a creation of new goods and services because we are using a new product for the first time that will provide us with a newly innovated results.

6. There’s a very heavy concentration of biotechnology firms in the Boston area, closely attached to the Massachusetts Institute of Technology. This concentration of biotech is usually considered one of the premier innovation clusters in the United States. If you were starting a new biotech company, which of the following would be an advantage of locating in the Boston area?
   • a) A large pool of well-trained scientists.
   • b) Warm climate.
   • c) Lack of competition from other companies in the same industry.
   • d) Easy access to special technical equipment.

I would use a large pool of well-trained scientists. The main advantage to starting your new biotech company in the Boston area is that you would have better access to the skilled workforce and the specialized machinery and materials that you need. Workers with the kinds of skills needed by firms in this industry will locate in the Boston area because they realize that there is a cluster of biotech firms there. Likewise, firms that offer products or services that support the biotech industry will also locate in the Boston area. This makes the inputs that you need cheaper because they’re located locally.