1. Suppose that interest rates are 6 percent in the economy, and a safe bond promises to pay $3 per year in interest forever. What do you think the price of the bond will be? Why? Suppose that the economy, interest rates suddenly fall to 3 percent. What will happen to the price of the bond that pays $3 per year?

2. For whom are stocks riskier than bonds? For whom are bonded riskier than stocks? Company A sells heaters, and Company B sells air conditioners. Is the safer investment, Company A stock, Company B stock, or a portfolio containing half of each?

3. Explain why P = MC in the perfectly competitive firm's short-run equilibrium, whereas in long-run equilibrium, P = MC = AC.

4. Explain why it is not sensible to close a business firm if it earns zero economic profits.

5. If the market price in a competitive industry were above its equilibrium level, what would you expect to happen?