Question 1

You have won the lottery. There are two payment options for you. The first option is a lump sum payment of $10 million that you will receive immediately. The second option is an annual payment of $1 million for each of the next 12 years. Assume there is no inflation. How would you make a decision between the two options?

Accepted Answer

The answer of You have won the lottery. There are...

Question 2

Efficient markets theory suggests that purchasing the published reports of financial analysts

Accepted Answer

A)  is likely to increase one's returns by an average of 5 percent. 
B)  is likely to increase one's returns by an average of about 3 to 5 percent. 
C)  is not likely to increase financial returns. 
D)  will increase financial returns in the first year but not in following years.

Question 3

A star basketball player signs a contract that newspaper reports say is worth $10 million. The player receives $5 million on signing, and $5 million a year for three years. The contract is worth

Accepted Answer

A)  $10 million as reported in the papers. 
B)  less than $10 million since the present value of $5 million received one or more years from now is less than $5 million. 
C)  more than $10 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 $10 million, depending on the value of the discount rate.

Question 4

In general, which form of business organization has the greatest capacity to raise large sums of financial capital?

Accepted Answer

A)  sole proprietorships 
B)  partnerships 
C)  limited partnerships 
D)  corporations

Question 5

When economic profits are positive, accounting profits

Accepted Answer

A)  must be positive. 
B)  will be negative. 
C)  will equal zero. 
D)  could be positive, negative or zero.

Question 6

All of the following are advantages of a corporation EXCEPT

Accepted Answer

A)  double taxation. 
B)  limited liability. 
C)  ability to raise large sums of financial capital. 
D)  unlimited life.

Question 7

Suppose that during a given time period the implicit cost for a business was $1,500 and that the explicit cost was $6,000. Also suppose that the firm sold 1,000 units of its products at $8 per item. We can conclude that the firm's

Accepted Answer

A)  accounting profit was $2,000, and its economic profit was $500. 
B)  accounting and economic profits were both $2,000. 
C)  accounting profit was -$500, and economic profit was $2,000. 
D)  accounting profit was $2,000, and economic profit was -$500.

Question 8

A payment to an owner of a resource in excess of its opportunity cost is know as

Accepted Answer

A)  real wages. 
B)  economic rent. 
C)  financial interest. 
D)  accounting profits.

Question 9

It is likely that the owners have little to do with the day-to-day management of a firm in the case of

Accepted Answer

A)  partnerships only. 
B)  proprietorships only. 
C)  corporations only. 
D)  partnerships and corporations.

Question 10

A difference between a proprietorship and a partnership is that

Accepted Answer

A)  a proprietorship is easy to form while a partnership is hard to form. 
B)  a proprietorship has only one owner while a partnership has only two owners. 
C)  a partnership allows for specialization while a proprietorship does not. 
D)  the profits in a proprietorship are taxed only once while in a partnership they are taxed twice.

Question 11

The funds used to purchase capital goods are called

Accepted Answer

A)  investment. 
B)  savings. 
C)  financial capital. 
D)  dividends and interest.

Question 12

Economic profit is

Accepted Answer

A)  total revenue × (explicit costs - implicit costs). 
B)  total revenue - (explicit costs - implicit costs). 
C)  total revenue + (explicit costs + implicit costs). 
D)  total revenue - (explicit costs + implicit costs).

Question 13

Suppose that the implicit cost for a business was $2,000 and the explicit cost was $5,000 and that the firm sold 1,000 units of its products at $7 per item. We can conclude that the firm's

Accepted Answer

A)  accounting profit was $7,000, and its economic profit was $0. 
B)  accounting and economic profits were both $0. 
C)  accounting profit was $2,000, and economic profit cannot be determined. 
D)  accounting profit was $2,000, and economic profit was $0.

Question 14

Businesses go to credit markets in order to

Accepted Answer

A)  obtain capital. 
B)  obtain financial assets that can be used to buy capital. 
C)  obtain capital so they can earn rents. 
D)  channel their savings into investments.

Question 15

Comparing proprietorships with partnerships, which is TRUE?

Accepted Answer

A)  In both cases, profits are taxed only once. 
B)  Partnerships outnumber proprietorships 2-to-1 in the United States. 
C)  Proprietorships generally end with the death of the owner, but partnerships continue as long as at least one partner survives. 
D)  A proprietor faces unlimited liability for her firm's debts, but in a partnership each partner is only responsible for an even share of the firm's indebtedness.

Question 16

Because handling charges are relatively fixed, the interest rate on a loan generally

Accepted Answer

A)  increases with the size of the loan. 
B)  decreases with the size of the loan. 
C)  is constant regardless of the size of the loan. 
D)  is unrelated to the size of the loan.

Question 17

Inside information

Accepted Answer

A)  applies to proprietorships only. 
B)  applies to proprietorships and partnerships only. 
C)  applies to corporations only. 
D)  applies to all forms of business.

Question 18

What is a normal rate of return?

Accepted Answer

The answer of What is a normal rate of return?...

Question 19

Accounting costs represent

Accepted Answer

A)  explicit costs paid by the firm. 
B)  opportunity costs. 
C)  both sunk and future costs. 
D)  long run costs only.

Question 20

-Refer to the above figure. If demand curve D1 is the relevant demand curve, rent is

Accepted Answer

A)  zero. 
B)  OG. 
C)  area FHGO. 
D)  area KHG.

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