Quiz
The Firm
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1. Which of the following statements correctly describes the nature of the business firm within the market economy?

a. The business firm is an entity that employs resources to produce goods and services that are to be sold to consumers, other firms, and the government.
b. Within a firm, the invisible hand of the manager guides and coordinates the actions of numerous individuals.
c. This guidance by the invisible hand is referred to as managerial coordination.
d. The actions of many firms are, in turn, coordinated by the visible hand of market forces that continually match demand and supply and establish all the prices that tell people what they can and cannot do.
e. This guidance by the visible hand is, in turn, referred to as market coordination.

2. Which of the following is a correct statement about team production?

a. Oftentimes, the quantity that individuals can produce jointly as a team exceeds the sum of what individual team members could produce when working alone.
b. The advantage noted in (a) is explained by decreased shirking in teams (because everyone watches everyone else).
c. The advantage noted in (a), and explained in (b), gives rise to the business firm.
d. The business firm is run by managers who coordinate the actions of team members in return for a fixed contractual salary.
e. All of the above.

3. Which of the following is a correct statement about shirking in a team?

a. It refers to the behavior of workers who put forth less than the agreed-upon effort.
b. Shirking in teams occurs because the costs of shirking to workers in teams are lower than for workers working alone.
c. According to efficiency wage theorists, shirking in teams can be reduced by paying wages above the market equilibrium level.
d. The action noted in (c) can raise a firm's profit, provided the obviously higher labor cost is more than offset by a lower monitoring cost.
e. All of the above statements are correct.

4. The goal of business firms, according to most economists, is

a. earning the largest possible profit.
b. making the largest possible sales.
c. earning a satisfactory profit.
d. maximizing the size of the firm, as measured, say, by number of employees.
e. separating ownership (by stockholders) from control (by managers).

5. Which of the following statements about U.S. business firms is correct?

a. Legally, they tend to take one of three forms: proprietorship, partnership, or corporation.
b. Roughly one quarter of all U.S. firms are proprietorships.
c. Roughly half of U.S. business receipts go to corporations.
d. Corporations tend to have unlimited liability, while proprietorships and partnerships do not.
e. All of the above.

6. A form of business that is owned by one individual who makes all the business decisions, receives the entire profit, and is legally responsible for the debts of the firm is called a proprietorship. Its manifold advantages include

a. the fact that the firm dies with the owner.
b. the fact that business profits are only taxed once.
c. the ease of raising funds for business expansion.
d. the limited liability of the owner.
e. all of the above.

7. A form of business that is owned by one individual who makes all the business decisions, receives the entire profit, and is legally responsible for the debts of the firm is called a proprietorship. Its manifold disadvantages do not include

a. the fact that the firm dies with the owner.
b. the fact that business profits are taxed more than once.
c. the difficulty of raising funds for business expansion.
d. the unlimited liability of the owner.
e. all of the above.

8. The owner of a proprietorship who has invested $50,000 in the business may be held responsible for the firm's debts

a. up to $50,000.
b. up to $100,000 (double jeopardy).
c. up to $150,000 (treble jeopardy).
d. with no upper limit, even at the expense of personal assets.
e. with no upper limit, provided there is enough money left in the firm.

9. A form of business that is owned by two or more co-owners (partners) who share any profits the business earns, and who each are legally responsible for all the debts incurred by the firm, is called a partnership. Its manifold advantages include

a. the fact that the partners have unlimited liability.
b. the fact that the voluntary withdrawal from the firm or the death of a partner causes the firm to be dissolved or restructured.
c. the fact that decision making is easy and uncomplicated.
d. the fact that this type of firm is an effective form of business organization in situations wherein team production involves skills that are difficult to monitor.
e. all of the above.

10. A form of business that is owned by two or more co-owners (partners) who share any profits the business earns, and who each are legally responsible for all the debts incurred by the firm, is called a partnership. Its manifold disadvantages include all of the following, except that

a. the partners have unlimited liability.
b. the voluntary withdrawal from the firm of a partner causes the firm to be dissolved or restructured.
c. decision making tends to be complicated and frustrating.
d. this type of firm is not an effective form of business organization in situations wherein team production involves skills that are difficult to monitor.
e. the death of a partner causes the firm to be dissolved or restructured.

11. A limited partner in a partnership who has invested $50,000 in the business may be held responsible for the firm's debts

a. up to $50,000.
b. up to $100,000 (double jeopardy).
c. up to $150,000 (treble jeopardy).
d. with no upper limit, even at the expense of personal assets.
e. with no upper limit, provided there is enough money left in the firm.

12. A legal entity that can conduct business in its own name the way an individual does, and that is owned by stockholders, is called a corporation. Its manifold advantages include all of the following, except the fact that

a. the owners of the corporation are not personally liable for the debts of the corporation.
b. the corporation continues to exist even when owners die.
c. the corporation continues to exist even when owners sell their shares of stock.
d. corporations are usually able to raise large sums of money.
e. stockholders escape taxes because the firm pays corporate income taxes for them.

13. A legal entity that can conduct business in its own name the way an individual does, and that is owned by stockholders, is called a corporation. Its disadvantages include the fact that

a. the owners of the corporation are not personally liable for the debts of the corporation.
b. the corporation continues to exist even when owners die.
c. the corporation continues to exist even when owners sell their shares of stock.
d. stockholders might wrest control from managers and pursue their own goals.
e. stockholders have to pay taxes on dividends and capital gains even though their corporation has already paid corporate income taxes.

14. In a firm's balance sheet, business debts equal

a. net worth minus assets.
b. net worth minus liabilities.
c. assets minus liabilities.
d. assets minus net worth.
e. liabilities minus assets.

15. This is a complete listing of a commercial bank's assets and liabilities: borrowings from the Fed 1,000; customer deposits 10,000; deposits at the Fed 900; outstanding loans (customer IOUs) 5,000; U.S. securities held 6,000; vault cash 100. What is the bank's net worth?

a. 500.
b. 1,000.
c. 2,000.
d. 10,000.
e. 12,000.

16. A student owns $100 in cash, $500 in books, $500 in clothing, and a $500 car. He also owes $50 to a roommate, $10,000 to his college, and $213.88 to the IRS. What is the student's net worth?

a. $10, 263.88.
b. $8,663.88.
c. $1,600.00.
d. zero.
e. - $8,663.88.

17. If a firm's assets equal $50 million and its net worth is $10 million, we know that its

a. assets equal its liabilities.
b. assets are smaller than its liabilities.
c. assets exceed its liabilities.
d. net worth exceeds its liabilities.
e. net worth equals its liabilities.

18. In order to acquire financial capital, corporations can borrow from banks, sell their own bonds, or issue additional shares of stock. Which of the following is true about stock?

a. A share of stock is essentially an IOU.
b. A share of stock is a debt obligation that promises to pay back a stated fixed sum of money at a specified point in time and to pay a fixed sum of money, called a dividend, periodically.
c. A share of stock gives the purchaser a share of corporate ownership.
d. Both (a) and (b).
e. None of the above.

19. When a corporation issues a bond, the following process takes place:

a. The bond specifies a dollar face value or par value, a coupon interest rate, and a maturity date.
b. If the par value is $1,000 and the coupon interest rate is 8%, the purchaser hands to the corporation $1,000 of money initially.
c. If the par value is $1,000 and the coupon interest rate is 8%, the corporation makes annual payments of $80 to the bondholder until the maturity date, at which time a final payment of $1,000 is made.
d. Both (a) and (c).
e. Both (b) and (c).

20. Which of the following statements correctly describes nonprofit firms?

a. If they fail to make a profit for many years in a row, they tend to go bankrupt and disappear from the scene.
b. They are, invariably, public rather than private firms and, therefore, a burden to taxpayers.
c. Because they have no residual claimants, there tends to be more shirking in such firms than in private business firms.
d. Private nonprofit firms are less likely to go bankrupt than public nonprofit firms.
e. All of the above.





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