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1 | |
Which of the following is an example of implicit cost? |
| | A) | Forgone rent on property owned by a firm. |
| | B) | The value of time worked by the owner of a firm. |
| | C) | Wages and salaries paid to employees. |
| | D) | both a and b. |
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2 | |
Accounting profit is |
| | A) | the difference between total revenue and total costs. |
| | B) | the difference between total revenue and implicit costs. |
| | C) | the difference between total revenue and explicit costs. |
| | D) | the difference between economic profit and total revenue. |
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3 | |
Joe owns a landscaping business and has received a pickup truck as a gift from his father, to help him expand his business. In this case, |
| | A) | the opportunity cost of the truck is zero. |
| | B) | the opportunity cost of the truck is not relevant for Joe's decisions to expand his business using the truck. |
| | C) | the opportunity cost of the truck is its current market value. |
| | D) | both a and b |
| | E) | none of the above |
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4 | |
Financial reporting of profits |
| | A) | understates the actual, or economic, profits of firms. |
| | B) | overstates the actual, or economic, profits of firms. |
| | C) | usually accurately indicates the actual profits of firms. |
| | D) | always includes opportunity costs. |
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5 | |
Which of the following statements is true? |
| | A) | Total cost includes the opportunity cost of the owner's resources. |
| | B) | When economic profit is zero, accounting profit is necessarily zero. |
| | C) | If accounting profit is positive, economic profit is always positive. |
| | D) | If economic profit is negative, accounting profit must also be negative. |
| | E) | None of the above statements is true. |
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6 | |
The value of a firm is |
| | A) | smaller the lower is the risk premium used to compute the firm's value. |
| | B) | larger the lower is the risk premium used to compute the firm's value. |
| | C) | the price for which the firm can be sold minus the present value of the expected future profits. |
| | D) | both b and c |
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7 | |
To maximize the value of the firm, managers should |
| | A) | pursue multi-period profit maximization. |
| | B) | pursue single-period profit maximization. |
| | C) | pursue value maximization instead of profit maximization |
| | D) | all of the above. |
| | E) | none of the above. |
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8 | |
A risk premium is |
| | A) | subtracted from the discount rate when calculating the present value of a future stream of risky profits. |
| | B) | a measure calculated to reflect the riskiness of future profits. |
| | C) | lower the more risky the future stream of profits. |
| | D) | an additional compensation paid to the workers of a business enterprise. |
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9 | |
Owners of a firm want the managers to make business decisions that will |
| | A) | maximize the value of the firm. |
| | B) | maximize the market share of the firm. |
| | C) | maximize expected profit in each period of operation. |
| | D) | both a and c are correct when revenue and cost conditions in one time period are independent of revenues and costs in future time periods. |
| | E) | both a and b are correct when revenue and cost conditions in one time period are independent of revenues and costs in future time periods. |
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10 | |
The principal-agent problem arises when |
| | A) | the principal and the agent have different objectives |
| | B) | the principal cannot decide whether the firm should seek to maximize the expected future profits of the firm or maximize the price for which the firm can be sold. |
| | C) | the principal cannot enforce the contract with the agent or finds it too costly to monitor the agent. |
| | D) | both a and c |
| | E) | none of the above |
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11 | |
Moral hazard |
| | A) | occurs when managers pursue profit maximization without regard to the interests of society in general. |
| | B) | is the cause of principal-agent problems. |
| | C) | occurs only rarely in modern corporations. |
| | D) | exists when either party to a contract has an incentive to cancel the contract. |
| | E) | both a and b |
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12 | |
A price-taking firm can exert no control over price because |
| | A) | of a lack of substitutes for the product. |
| | B) | the firm's individual production is insignificant relative to production in the industry. |
| | C) | many other firms produce a product that is nearly identical to its product. |
| | D) | both b and c |
| | E) | both a and b |
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13 | |
Which of the following statements is true? |
| | A) | Shareholders have little or no ability to force managers to pursue maximization of the firm's value. |
| | B) | The effectiveness of a board of directors in monitoring managers will be enhanced by appointing members from the firm who are well-informed about the management problems facing the firm. |
| | C) | Equity ownership by managers is thought to be one of the most effective corporate control mechanisms. |
| | D) | Reducing the amount of debt financing can reduce the divergence between the shareholders' interests and the owner's interests. |
| | E) | none of the above is true |
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14 | |
When a firm is a price-taking firm, |
| | A) | the price of the product it sells is determined by the intersection of the firm's demand and supply curves for the product. |
| | B) | raising the price of the product above the market-determined price will not cause a significant drop in sales. |
| | C) | many other firms produce a product that is identical to the output produced by the rest of the firms in the industry. |
| | D) | all of the above |
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15 | |
A price-setting firm |
| | A) | can lower the price of its product and sell more units. |
| | B) | cannot raise the price of its product without losing nearly all of its sales. |
| | C) | does not possess market power. |
| | D) | sells a product that is somehow differentiated from the product sold by its rivals or sells in a limited geographic market area with only one or a few sellers. |
| | E) | both a and d |
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16 | |
A market |
| | A) | lowers the transaction costs of doing business. |
| | B) | is any arrangement that brings buyers and sellers together to exchange goods or services. |
| | C) | is an institution used exclusively by capitalist nations. |
| | D) | both b and c |
| | E) | both a and b |
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17 | |
Which of the following is NOT a feature characterizing market structures? |
| | A) | the number and size of firms. |
| | B) | the level of capital investment in research and development. |
| | C) | likelihood of new firm's entering a market. |
| | D) | the degree of product differentiation. |
| | E) | all of the above characterize market structures. |
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18 | |
When a firm earns negative economic profit, |
| | A) | the revenues generated cannot cover all the explicit costs and the opportunity cost of using owner-supplied resources. |
| | B) | total revenue exceeds total cost. |
| | C) | accounting profits must also be negative. |
| | D) | managers will resist changes in use of resources used in the firm. |
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19 | |
Economic profit is the best measure of a firm's performance because |
| | A) | economic profit fully accounts for all sources of revenue. |
| | B) | normal profit is generally too difficult to measure accurately. |
| | C) | the opportunity cost of using ALL resources is subtracted from total revenue. |
| | D) | only explicit costs influence managerial decisions since, in general, only explicit costs can be subtracted from revenue for the purposes of computing taxable profit. |
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20 | |
A manager who does not see his or her goal as the maximization of profit |
| | A) | represents the principal-agent problem. |
| | B) | may nevertheless maximize the value of the firm. |
| | C) | will likely be replaced either by shareholders or by a takeover of the firm. |
| | D) | both a and c |
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