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| 1 | |
Economic profit is… |
| | A) | calculated by subtracting implicit costs of using owner-supplied resources from the firm's total revenue. |
| | B) | a theoretical measure of a firm's performance and has little value in real world decision-making. |
| | C) | generally larger than accounting profit. |
| | D) | negative when costs exceed revenues. |
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| 2 | |
Economic profit is… |
| | A) | the difference between total revenue and explicit costs. |
| | B) | the difference between total revenue and the opportunity cost of all the resources used in production. |
| | C) | the difference between accounting profit and explicit costs. |
| | D) | the difference between accounting profit and the opportunity cost of the market-supplied resources used by the firm. |
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| 3 | |
When economic profit is negative, |
| | A) | total economic cost exceeds total revenue. |
| | B) | the firm's owners experience the principal-agent problem. |
| | C) | the firm's owners experience a decrease in wealth. |
| | D) | both a and b |
| | E) | both a and c |
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| 4 | |
Consider a firm that employs some resources that are owned by the firm. When economic profit is zero, accounting profit is |
| | A) | positive and equal to the opportunity cost of all the resources used in production. |
| | B) | equal to the implicit costs of using owner-supplied resources. |
| | C) | negative. |
| | D) | also zero. |
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| 5 | |
Which of the following statements is true? |
| | A) | Implicit costs are the opportunity cost of the owner's resources. |
| | B) | When economic profit is zero, the firm could have done better putting their resources in some other industry of comparable risk. |
| | C) | If accounting profit is positive, economic profit must be negative. |
| | 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 | |
Suppose Dave, the owner-manager of Dave's Golf Academy, earned $200,000 in revenue last year. Dave's explicit costs of operation totaled $130,000. Dave has a Bachelor of Science degree in civil engineering and could be earning $60,000 annually as a civil engineer. |
| | A) | Dave's implicit cost of using owner-supplied resources is $130,000. |
| | B) | Dave's economic profit is $70,000. |
| | C) | Dave's implicit cost of using owner-supplied resources is $60,000. |
| | D) | Dave's economic profit is $10,000. |
| | E) | both c and d. |
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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 are 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 industry demand and supply curves for the product. |
| | B) | raising the price of the product above the market-determined price will cause the firm to lose all of its 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 | |
Which of the following is a characteristic of a perfectly-competitive market? |
| | A) | The firms are price-setters. |
| | B) | All firms produce and sell a standardized or undifferentiated product. |
| | C) | It is difficult for new firms to enter the market due to barriers to entry. |
| | D) | The output sold by a particular firm may be quite different from the output sold by the other firms in the market. |
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| 19 | |
Which of the following is a characteristic of a monopoly market structure? |
| | A) | Close substitutes for the product are available. |
| | B) | There are barriers to entry. |
| | C) | The entire market output is produced by only a few firms. |
| | D) | The greater the ability of consumers to find imperfect substitutes for the firm's product, the lower will be the firm's market power. |
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| 20 | |
Economic profit is the best measure of a firm's performance because… |
| | A) | economic profit fully accounts for all sources of revenue. |
| | B) | implicit costs are 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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