Question 1

For which type of organization is unlimited liability likely to be the greater problem-proprietorships or partnerships? Why?

Accepted Answer

Unlimited liability probably poses more problems for partnerships because each partner is liable for debts incurred by the firm, even if those debts are incurred by the other partner. A proprietor knows all the debts he or she has taken on, but a partner could be in the dark on some occasions.

Question 2

The implicit cost incurred by a firm to use its resources to produce its output is the firm's

Accepted Answer

A)   total cost.
B)   explicit cost.
C)   opportunity cost.
D)   accounting cost. C

Question 3

An advantage of the corporate form of business organization is

Accepted Answer

A)   unlimited liability.
B)   easier access to capital.
C)   that profits are taxed only on one level.
D)   government supervision of its activities. B

Question 4

If the nominal interest rate is high and rising, a possible cause is

Accepted Answer

A)   increased lending activity.
B)   a rising inflation rate.
C)   a falling real interest rates.
D)   increased government borrowing.

Question 5

What is the present value of $100 two years from now at an interest rate of 5%?

Accepted Answer

A)   $105
B)   $95.24
C)   $90.70
D)   $5

Question 6

What is the present value of $100 one year from now at an interest rate of 5%?

Accepted Answer

A)   $5
B)   $95.24
C)   $100
D)   $105

Question 7

The interest rate used to bring future sums back to present value is

Accepted Answer

A)   always negative.
B)   zero when there is no inflation.
C)   the rate of discount.
D)   the prime rate.

Question 8

Which of the following is the most common form of business organization in the United States?

Accepted Answer

A)   Proprietorship
B)   Partnership
C)   Corporation
D)   S-corporation

Question 9

The disadvantages of proprietorships include

Accepted Answer

A)   limited liability for the owner.
B)   double taxation of business profits.
C)   the fact that the proprietorship can continue even after the owner dies.
D)   the fact that the proprietor is solely responsible for all the firm's debts.

Question 10

When a resource has a perfectly elastic supply curve,

Accepted Answer

A)   the amount of economic rent for the resource is determined by its supply.
B)   the amount of economic rent for this resource is determined by demand for the resource.
C)   there is no economic rent being earned by this resource.
D)   the entire payment received by this resource is economic rent.

Question 11

In the market for land, if the supply of land is perfectly inelastic, an increase in the demand for land will result in a(n)

Accepted Answer

A)   increase in the real interest rate.
B)   increase in economic rent.
C)   decrease in the equilibrium price.
D)   increase in the quantity supplied of land.

Question 12

A famous opera star made $2 million per year. He said he would rather sell insurance if he couldn't make more than $100,000 per year. If he is telling the truth, how much is he being paid in economic rent?

Accepted Answer

A)   $2.0 million
B)   $100,000
C)   $1.9 million
D)   $2.1 million

Question 13

The real rate of interest is

Accepted Answer

A)   the nominal interest rate minus the anticipated rate of inflation.
B)   the interest rate actually paid explicitly by the borrower.
C)   the interest rate received by the lender minus the handling charges of the loan.
D)   the average rate of interest over the last 20 years.

Question 14

In economic terms, interest is the payment for

Accepted Answer

A)   current command over resources.
B)   producers' goods.
C)   stocks.
D)   both consumer and capital goods.

Question 15

Interest rates perform the function of

Accepted Answer

A)   signaling information about the inflation rate.
B)   allocating funds, but only in the consumer sector.
C)   allocating funds, which determines the allocation of physical capital.
D)   rewarding those who save but has no direct allocative role.

Question 16

A star basketball player signs a contract that newspaper reports say is worth $20 million. The player receives $5 million on signing, and $5 million a year for three years. The contract is worth

Accepted Answer

A)   $20 million as reported in the papers.
B)   less than $20 million since the present value of $5 million received one or more years from now is less than $5 million.
C)   more than $20 million because the present value of $5 million received one or more years from now is more than $5 million.
D)   either more or less than $20 million, depending on the value of the discount rate.

Question 17

When an entrepreneur invests his own financial capital in order to start a business,

Accepted Answer

A)   the opportunity cost of capital should be included in the economic cost of doing business.
B)   the investment is treated as a fixed cost, so it should not be considered as a cost of doing business.
C)   the firm's economic profits will exceed its accounting profits.
D)   the accounting costs increase because the funds would otherwise have to be borrowed.

Question 18

Mary and Jane are partners in a business. Their business is growing but has not yet reached the point where they can afford a new delivery truck. Jane owns an old truck that she has not been using. She decides to donate it to their business for free.

Accepted Answer

A)   This transaction (donation)  involves no economic cost.
B)   This transaction involves both economic cost and accounting cost.
C)   This transaction involves economic cost but no accounting cost.
D)   This transaction involves no economic cost and no accounting cost.

Question 19

The most numerous or plentiful firms in the United States are found in this form of business

Accepted Answer

A)   partnership.
B)   proprietorship.
C)   monopoly.
D)   corporation.

Question 20

Compared to a proprietorship, an advantage of a partnership is

Accepted Answer

A)   that profits are not taxed twice.
B)   double taxation.
C)   the ability to take advantage of greater specialization.
D)   the limited liability of the partners.

Exam 21: Rents, Profits, and the Financial Environment of Business