Chapter 7

Theory of the Firm

1) BM07 \ A \ \ Production \ 1 \ Altering goods or resources in ways that make them more valuable is: (a) production. (b) consumption. (c) profitability. (d) distribution. 2) BM07 \ B \ \ Production \ 2 \ Ice has a higher price in Dallas, Texas than Anchorage, Alaska. The increased value of the ice is due to its changing: (a) form. (b) place. (c) possession. (d) time. 3) BM07 \ E \ \ Production \ 1 \

Examples of individuals engaged in productive activities would not include a: (a) speculator who buys wheat at harvest time and sells it at a higher price later. (b) trucker who hauls grain from North Dakota to a flour mill in Minneapolis. (c) realtor who helps a family sell its home when they are moving out-of-state. (d) politician who successfully sponsors legislation to simplify income tax laws. (e) student watching TV instead of studying, and then flunking out of school. 4) BM07 \ B \ \ Production \ 1 \ A trucker who hauls fresh oranges from Florida to New York increases the value of the oranges by directly and productively altering their: (a) form and substance. (b) place or location. (c) possession or ownership. (d) time of consumption. 5) BM07 \ D \ \ Production \ 2 \

Production that alters the chemical or physical structures of a good generates utilities of: (a) substance. (b) time and place. (c) possession. (d) form.
Ralph Byrns Chapter 7: Theory of the Firm Test Bank Two

6) BM07 \ A \ \ Production and Value \ 3 \ People who work in financial markets are least likely to create value by being productive through alteration of the: (a) form of materials. (b) location of materials. (c) time when the materials are available. (d) possession [ownership] of the materials. 7) BM07 \ C \ \ Resources: Intermediate Goods \ 2 \

Intermediate inputs into a production process would include: (a) crude oil. (b) untreated water. (c) flour. (d) tennis shoes. 8) BM07 \ D \ \ Economic Capital \ 1 \ Your construction company recently bought a bulldozer on credit. From the perspective of your company, this bulldozer is an example of: (a) a liability. (b) fixed costs. (c) total variable cost. (d) economic capital. (e) capitalization. 9) BM07 \ B \ \ Analytic Time: The Market Period \ 1 \ According to Alfred Marshall, a period of time so short that output is fixed is the: (a) atemporal period. (b) market period [or immediate period]. (c) short run. (d) long run. (e) chronological run. 10) BM07 \ E \ \ Analytic Time: The Short Run \ 1 \ In the short run: (a) all resources are variable. (b) firms can enter or exit an industry. (c) economies of scale are present. (d) total fixed cost increases with output. (e) at least one resource is fixed.

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11) BM07 \ C \ \ Analytic Time: The Short Run \ 1 \ In the short run: (a) the quantities of all of a firms resources are variable. (b) managers are less efficient than they are in the long run. (c) at least one resource is fixed in quantity used. (d) total fixed costs will be less than in the long run. 12) BM07 \ B \ \ Analytic Time: The Short Run \ 2 \ The resource that a carpet manufacturer is most likely to view as variable in the short run would be: (a) a warehouse it owns (b) a truck driver. (c) a truck on a five-year lease agreement. (d) the firms biggest factory. 13) BM07 \ A \ \ Analytic Time: The Short Run \ 2 \ When Alfred Marshall categorized analytical periods of time, he assumed that in the short run it is: (a) impossible to vary technology, and at least one resource is fixed so that at least one type of cost is also fixed. (b) possible to move resources from one industry to another. (c) possible to vary technology, but at least one resource is fixed and consequently at least one form of cost is also fixed. (d) possible to vary all resources and costs, but not technology. 14) BM07 \ C \ \ Analytic Time \ 1 \ In the economic theory of production: (a) average fixed costs uniformly fall as the capacity of the firm increases. (b) technology can be varied completely. (c) the choices available to a firm increase as longer periods are considered. (d) firms that do not cover all historical costs cannot survive. (e) firms may enter or leave a competitive market faster than technology changes. 15) BM07 \ D \ Analytic Time: The Long Run \ 2 \ The length of time required for a firm to reach the long run is: (a) one year. (b) five years. (c) ten years. (d) variable, and depend on the ease of buying or selling specific types of resources.

Ralph Byrns

Chapter 7: Theory of the Firm

Test Bank Two

16) BM07 \ A \ \ Analytic Time: The Long Run \ 1 \ In the long run: (a) the firm can vary all inputs. (b) the firm can vary some inputs, but not all. (c) capital begins to depreciate. (d) output rises. 17) BM07 \ B \ \ Analytic Time: The Long Run \ 1 \ The long run for production theory is a time period across which: (a) all production takes place. (b) firms can adjust all their resources and costs. (c) larger firms absorb smaller firms. (d) marginal costs become decreasingly important. (e) implicit costs become explicit costs. 18) BM07 \ D \ \ Analytic Time: The Technological Long Run \ 1 \ The chronological time required for technology to respond to changes in profit opportunities [the technological long run, also known as the super long run, or temporal long run] is: (a) longer than the analytical long run for the firm. (b) shorter than the market period. (c) intermediate, being somewhat shorter than the analytical long run, but longer than the analytical short run. (d) highly variable and it depends on the dynamics of the industry, including such factors as the maturity of the industry, the amounts and types of human capital possessed by various entrepreneurs, the innovation occurring in related industries, the number of entrepreneurs in the industry, the vigor of competition in the industry, ad infinitum. (e) dependent primarily on political cycles of regulation and deregulation. 19) BM07 \ D \ \ Institutions \ 1 \ In market economies, resources are ultimately owned by the: (a) corporations that dominate economic activity. (b) partnerships and proprietorships. (c) business firms, collectively. (d) individual households. (e) government, acting as a social trustee. 20) BM07 \ B \ \ Institutions \ 1 \ The summation of all firms that produce a given product is classified as: (a) a multinational. (b) an industry. (c) a plant. (d) a monopoly. (e) a cartel.
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21) BM07 \ D \ \ Horizontal Integration \ 1 \ Firms that operate several plants which produce the same good are: (a) vertically integrated. (b) proprietorships. (c) producing leakages in the circular flow. (d) horizontally integrated. 22) BM07 \ C \ \ Horizontal Mergers \ 2 \ Which of the following is NOT an example of horizontal integration? (a) Prudential Insurance acquires Metropolitan Life Insurance. (b) K-Mart acquires Sears. (c) McDonalds acquires Ore-Ida farms to more directly control potato production. (d) BancOne acquires Affiliated National Banks. (e) Daimler-Benz absorbs Chrysler. 23) BM07 \ B \ \ Vertical Integration \ 1 \ An example of a vertical merger would be: (a) merging the Oscar Myer hotdog Company with Wrangler Jeans Company and Aquafina Water Company. (b) a log cabin architecture firm merging with a logging company and a construction company. (c) General Mills Cereal buys Kelloggs Cereal and Post Cereal companies. (d) a merger between Wachovia Bank and Bank of America. 24) BM07\A \\Vertical Integration \1\ Vertical integration is a characteristic of all firms that: (a) control multiple aspects of the production of an output from raw materials to retail sales. (b) operate as international cartels, dealing primarily in nonrenewable resources. (c) monopolize numerous local markets for goods that most people view as necessities. (d) merge with other firms that sell similar products. (e) have widely recognized brand names. 25) BM07 \ B \ \ Conglomerates \ 2 \ The K-Mart Corporation operates K-mart and Sears retail stores, provides financial services such as insurance and the Discover card, and has a real estate division. These characteristics identify K-Mart as a: (a) vertically integrated firm. (b) conglomerate firm. (c) monopolistically competitive corporate raider. (d) multinational firm.

Ralph Byrns

Chapter 7: Theory of the Firm

Test Bank Two

26) AM07 \ D \\ Privatization \ 2 \\ Privatization is the process by which for-profit business firms: (a) convert small entrepreneurships into large corporations. (b) hiring professional administrators to help manage operations. (c) sell corporate stocks and bonds to secure economic capital. (d) buy and then operate previously government-run forms of production. 27) BM07 \ B \ \ Mergers \ 1 \ The Overpriced Petroleum Extraction Company [OPEC] has just announced its acquisition of several small firms with facilities that will allow OPEC to process oil through the entire refining process, from oil field recovery through transporting and then retailing the refined petroleum products. These acquisitions are an example of: (a) horizontal integration. (b) vertical integration. (c) diagonal integration. (d) inverse integration. (e) conglomerate integration. 28) BM07 \ A \ \ Firms and Transaction Costs \ 1 \ The survival of all firms ultimately depends on the ability to: (a) reduce transaction costs to consumers. (b) generate economic profit. (c) maximize the value of output for a given cost. (d) minimize the costs of producing given amounts of output. (e) lobby for favorable legislation. 29) BM07 \ B \ \ Firms and Transaction Costs \ 1 \ The broad social purposes served by firms do not include: (a) coordination of team production. (b) maximization of stockholder profits. (c) reduction of transaction costs. (d) exploitation of economies of scale and scope. (e) development of new products and more efficient production technologies. 30) BM07 \ C \ \ Arbitrage and Transaction Costs \ 1 \ An individual or organization that simultaneously buys low and sells high in different markets is a/an: (a) elevator. (b) speculator. (c) arbitrageur. (d) analyst. (e) operator.

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31) BM07 \ C \ \ Arbitrage and Transaction Costs \ 1 \ Buying low in one market and simultaneously selling high in another market is known as: (a) speculation. (b) gambling. (c) arbitrage. (d) hedging. (e) optioning. 32) BM07 \ C \ \ Shirking \ 1 \ Jared, a computer programmer, plays computer games all day instead of doing his work. This is an example of: (a) moral turpitude. (b) inefficiency wages. (c) shirking. (d) X-inefficiency. (e) managerial slack. 33) BM07 \ B \ \ Economies of Scale \ 2 \ Economies of scale exist when average production costs: (a) rise as the level of output rises. (b) fall as the level of output rises. (c) stay the same as the level of output rises. (d) fall as the level of output falls. 34) BM07 \ C \ \ Economies of Scale \ 1 \ Reducing average production costs requires increasing the size of a firm if the increased production encounters economies of: (a) development. (b) coordination. (c) scale. (d) growth. (e) scope. 35) BM07 \ E \ \ Economies of Scale \ 2 \ If average production costs increase as the total production of a firm increases, the firm is experiencing: (a) economies of scale. (b) diseconomies of scope. (c) economies of scope. (d) diseconomies of structure. (e) diseconomies of scale.

Ralph Byrns

Chapter 7: Theory of the Firm

Test Bank Two

36) BM07 \ B \ \ Economies of Scale \ 2 \ Consider an auto manufacturer that can produce 10 cars at an average cost of $8000 per car. If the manufacturer expands output to 100 cars, the average cost of production drops to $5000 per car. This firm is experiencing: (a) increased demand. (b) economies of scale. (c) falling marginal costs. (d) economies of scope. 37) BM07 \ C \ \ Economies of Scope \ 1 \ A soft drink bottler that finds it cost efficient and profitable to deliver chips and other snack foods along with cola would be experiencing: (a) economies of scale. (b) positive psychic income. (c) economies of scope. (d) economies of structure. (e) diseconomies of scale. 38) BM07 \ D \ \ Economies of Scope \ 2 \ Bobby Lees Dairy has profitably expanded beyond fresh milk, butter, and cheese, by offering Organizmic Fertilizer, guided ATV tours for visitors, and Granny Lees Exfoliating Body Yogurt. The Clyde County Business News trumpets that Bobby Lee has beaten everyone to the punch by imaginatively exploiting: (a) economies of scale through product differentiation. (b) the natural monopoly position of the dairy industry. (c) the incentive to cheat on the rest of the dairy cartel. (d) economies of scope. (e) diseconomies of scale by spreading overhead. 39) BM07 \ A \ \ Economies of Scope \ 1 \ A retailer offering multiple lines of clothes in a mall is attempting to exploit economies of: (a) scope. (b) scale. (c) structure. (d) information. (e) transaction costs. 40) BM07 \ C \ \ Entrepreneurship \ 2 \ Characteristics common to many successful entrepreneurs do not include: (a) vision and timing. (b) conviction and action. (c) luck and bureaucratic one-upmanship. (d) determination and workaholism.
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41) BM07 \ C \ \ Institutions \ 2 \ Most firms in the United States are organized as ________, but 2/3 of all profit is received by _________. (a) partnerships; corporations. (b) corporations; limited partnerships. (c) proprietorships; corporations. (d) proprietorships; partnerships. 42) BM07 \ C \ \ I Proprietorships \ 1 \ A business owned and operated by a lone individual is a(n): (a) unit of labor. (b) entrepreneurship. (c) sole proprietorship. (d) corporation. 43) BM07 \ A \ \ Proprietorships and Partnerships \ 1 \ Anna and Beth each own a florist shop. After years of rivalry, they decide to team up and create a partnership. A potential advantage of such a union would be that: (a) they can split up duties and become more efficient. (b) their partnership gains significantly greater financial resources. (c) Beth views Anna as incompetent and denies Anna an equal share of profits. (d) a partnership is subject to no government regulations. 44) BM07 \ B \ \ Proprietorships \ 2 \ Which of the following is NOT an advantage of a sole proprietorship? (a) Ease of organization. (b) Limited liability. (c) Flexibility. (d) Freedom from government regulation. 45) BM07 \ B \ \ Proprietorships and Partnerships \ 2 \ The term unlimited liability in a partnership means that a partner: (a) pays to start to the partnership, but cannot be held liable for additional funds. (b) can be held personally responsible for any and all of the partnerships debts. (c) owns 100% of the partnership. (d) can unilaterally make all decisions for the firm. 46) BM07 \ B \ \ Proprietorships and Partnerships \ 2 \ One advantage of a partnership over a proprietorship is: (a) in a partnership only one partner is liable for debt. (b) partnerships allow for more specialization in management. (c) partnership income is not double taxed. (d) partnerships are capable of raising large amounts of capital through the sale of stocks.
Ralph Byrns Chapter 7: Theory of the Firm Test Bank Two

47) BM07 \ B \ \ Proprietorships and Partnerships\ 2 \ Sole proprietorships and partnerships account for a ________ percent of all U.S. firms and a _________ percent of sales by U.S. firms: (a) large; large. (b) large; small. (c) small; large. (d) small; small. 48) BM07 \ D \ \ Proprietorships and Partnerships: Unlimited Liability\ 2 \ A sole proprietorship owned and operated by a lone individual is at a disadvantage when compared to a corporation because it lacks relatively: (a) flexible legal options about opening or ending its operations. (b) tighter laws and regulations on its owners decisions. (b) control of operations by its owners. (c) simple structure of organization. (d) limited legal liability. 49) BM07 \ E \ \ Corporations \ 2 \ Ownership shares in a corporation are called: (a) bonds. (b) entrepreneurial capital. (c) retained equity. (d) net worth. (e) common stock. 50) BM07 \ D \ \ Corporations \ 2 \ Corporations account for roughly ______ of U.S. business revenues. (a) 1/4. (b) 1/6. (c) 1/2 (d) 5/6. (e) all. 51) BM07 \ D \ \ Corporations \ 2 \ Over half of all manufacturing assets are held by the _____ largest corporations in the United States. (a) 5 (b) 10 (c) 100 (d) 200

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52) BM07 \ D \ \ Corporations \ 2 \ An individual who wants to start up a business, but who does not want to risk losing personal property if the business fails, should organize the business as: (a) a sole proprietorship. (b) a partnership. (c) an unlimited partnership. (d) a corporation. 53) BM07 \ D \ \ Corporations \ 2 \ Owners usually cannot lose more than their financial investments if a firm is a: (a) proprietorship. (b) partnership. (c) family business. (d) corporation. 54) BM07 \ D \ \ Corporations \ 1 \ Firms sanctioned by state laws and considered legal entities separate and distinct from their owners are: (a) partnerships. (b) common bond firms. (c) non-profit organizations. (d) corporations. (e) proprietorships. 55) BM07 \ A \ \ Corporate Taxes \ 2 \ One of the disadvantages of a corporation is: (a) the double taxation of its profits. (b) its unlimited liability. (c) its inability to outlive the death of an owner. (d) its inability to raise financial resources. 56) BM07 \ D \ \ Corporations \ 2 \ An entrepreneur who wants to maximize her firms access to funds from investors or banks should organize the business as a: (a) proprietorship. (b) partnership. (c) cooperative. (d) corporation.

Ralph Byrns

Chapter 7: Theory of the Firm

Test Bank Two

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57) BM07 \ C \ \ Financial Capital \ 2 \ Securing financing for economic capital for a corporation cannot be accomplished by: (a) issuing common stock. (b) issuing corporate bonds. (c) securing the majority stockholder share of another company. (d) borrowing from a financial institution. 58) BM07 \ C \ \ Intermediation \ 3 \ The major reason for the existence of financial intermediaries is: (a) direct flows of savings from individuals to firms would entail higher transaction costs. (b) the habits of individuals who keep their savings in deposits at financial institutions. (c) that only wealthy individuals can afford to invest in stocks and bonds. (d) All of the above are reasons for the existence of financial intermediaries. 59) BM07 \ B \ \ Financial Capital \ 2 \ Because of the high probability of bankruptcy and default of a new corporation, new corporations: (a) have little trouble selling bonds. (b) have more trouble selling bonds than established corporations. (c) would prefer to issue stock. (d) would prefer to sell bonds. 60) BM07 \ E \ \ Corporate Finance \ 1 \ The least likely of the following to be claimants to a firms income stream would be the firms: (a) shareholders. (b) managers. (c) government. (d) suppliers. (e) customers. 61) BM07 \ B \ \ Corporate Finance \ 2 \ An individual who buys a newly-issued corporate bond is: (a) borrowing money from the corporation. (b) lending money to the corporation. (c) buying a share of the corporation. (d) legally liable for a share of the debts of the corporations.

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62) BM07 \ A \ \ Corporate Finance \ 2 \ The major source of external funding used when major American corporations have expanded their operations in the past three decades has been: (a) borrowing from commercial banks. (b) selling record amounts of new corporate stock. (c) borrowing by issuing corporate bonds. (d) investing retained earnings [income not paid out as dividends to stockholders]. (e) borrowing from governmental agencies. 63) BM07 \ D \ \ Corporate Finance and Retained Earnings \ 2 \ The corporate income kept by the corporation after paying corporate income taxes and dividends to the owners of common stock is called: (a) pure profit. (b) treasury stock. (c) operating capital. (d) retained earnings. (e) net proceeds. 64) BM07 \ B \ \ Profits and Losses \ 2 \ Monetary revenue generated by a firm during a given period minus its explicit costs yields: (a) value added. (b) accounting profit. (c) tax liability. (d) economic income. (e) gross cash flow. 65) BM07 \ A \ \ Profits and Losses \ 2 \ Economic profit is the difference between total revenue and: (a) the sum of implicit and explicit economic costs. (b) monetary outlays. (c) variable cost. (d) accounting cost. 66) BM07 \ A \ \ Profits and Losses \ 2 \ Accounting profit is the difference between: (a) dollar revenues and accounting costs. (b) accounting cost and economic cost. (c) total revenue and economic cost. (d) psychic income and economic income.

Ralph Byrns

Chapter 7: Theory of the Firm

Test Bank Two

13

67) BM07 \ C \ \ Profits and Losses \ 2 \ Normal accounting profits are considered by economists to be: (a) exploitation of the consumer. (b) evidence of monopoly power. (c) economic costs of production. (d) excessive economic profit. Figure B0768

68) BM07 \ B \ B0768 \ Implicit Costs \ 3 \ If the only implicit costs for this business are the income the owner was earning prior to opening this firm and if explicit costs are incurred only as production occurs, then the implicit costs for this business correspond to: (a) point a. (b) point b. (c) point c. (d) point d. 69) BM07 \ D \ B0768 \ Implicit Costs \ 3 \ If the only implicit costs for this business are the income the owner earned previously and if explicit costs are incurred only as production occurs, then the explicit costs for this business correspond to: (a) point a. (b) point b. (c) point c. (d) all costs in excess of $400 per week.

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70) BM07 \ A \ \ Profits and Losses \ 2 \ Economic profit equals: (a) accounting profit minus implicit costs. (b) total revenue minus explicit costs. (c) total revenue minus implicit costs. (d) normal profit. 71) BM07 \ B \ \ Profits and Losses \ 2 \ An economic loss takes place when total revenue: (a) is equal to total costs. (b) fails to cover opportunity costs. (c) exceeds opportunity costs. (d) exceeds explicit costs. 72) BM07 \ D \ \ Profits and Losses \ 2 \ Accounting profits differ from economic profits in that: (a) accounting profits take into account opportunity costs, while economic profits take into account only explicit costs. (b) economic profits can be zero, while accounting profits cannot. (c) accounting profits consider only explicit costs, while economic profits consider only implicit costs. (d) economic profits consider explicit costs plus implicit costs, while accounting profits consider only explicit costs. 73) BM07 \ C \ \ Profits and Losses \ 3 \ Suppose you earn an annual salary of $25,000. You also have $10,000 in savings that earns $1,000 per year in interest. Now suppose you quit this job to open your own business and invest all your savings in the new business. In the first year, you take in revenues of $40,000 and make payments of $20,000 to cover your explicit costs. Your economic profit in the first year is: (a) $20,000. (b) -$16,000. (c) -$6,000. (d) -$5,000. (e) -$15,000.

Ralph Byrns

Chapter 7: Theory of the Firm

Test Bank Two

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74) BM07 \ C \ \ Economic Profit and Accounting Profit \ 2 \ Sara left her high stress job at the hospital as a neurosurgeon making $250,000 annually to launch Flowers-to-Go, a new firm. Sara still feels similar amounts of stress, so she recently hired an accountant to keep the books. At the end of the first six months of business, the shops total sales revenue is $25,000 and total explicit costs are $15,000. Flowers-to-Go has generated a: (a) positive economic profit. (b) net accounting loss. (c) positive economic loss. (d) net accounting profit of $20,000 for the year. 75) BM07 \ B \ \ Profits and Losses \ 2 \ A firm has $70,000 in implicit costs, and economic profit of $40,000. This firms: (a) explicit costs equal $30,000. (b) accounting profits equal $110,000. (c) normal profit equals $40,000. (d) explicit costs equal $110,000. 76) BM07 \ C \ \ Profits and Losses \ 3 \ Suppose a banker is employed at an annual salary of $60,000. She also has financial assets worth $40,000 that earn $1,500 per year in interest. She also owns a commercial building which she rents out for $20,000 per year. Now suppose she quits this job to open her own business, invests all her financial assets in the new business and uses her commercial building for her business instead of renting it out. In the first year of business, she takes in revenues of $140,000 and makes payments of $70,000 to cover her explicit costs. Her economic profit the first year is: (a) $30,000. (b) $10,000. (c) -$11,500. (d) -$51,500. (e) -$30,000. 77) BM07 \ B \ \ Economic Profits and Losses \ 3 \ Any firm will shut down in the long run if its: (a) economic profit does not exceed zero. (b) future revenues are not expected to cover all future costs of production. (c) implicit costs exceed all explicit costs. (d) owners are faced with unlimited liability for any potential debts of the firm. (e) original owners die or quit working.

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78) BM07 \ A \ \ Profits and Losses \ 2 \ If implicit cost exceeds implicit revenue and economic profit is zero, accounting profit is: (a) greater than zero. (b) zero. (c) less than zero. (d) not specifiable without more information. 79) BM07 \ D \ \ Explicit Costs \ 2 \ Which of the following is an example of an explicit cost? (a) the owners time. (b) depreciation on a company owned truck. (c) the interest that could be earned if some of the owners funds were not tied up in the business. (d) wages paid to employees. 80) BM07 \ C \ \ Explicit Costs \ 2 \ An entrepreneurs explicit costs would include: (a) forgone interest on the owners savings. (b) value of the entrepreneurs labor. (c) interest payments on business loans. (d) lost wages from the entrepreneurs previous job. 81) BM07 \ B \ \ Implicit Costs \ 2 \ An example of an implicit cost would be: (a) wages paid to employees. (b) payments for repairs on a company-owned machine. (c) rent paid on the building the company uses. (d) interest a stockholder could earn by owning U.S. treasury bonds instead of corporate stock. (d) utility bills. 82) BM07 \ D \ \ Implicit Costs \ 2 \ Implicit costs are: (a) the same as explicit costs. (b) always variable costs. (c) the same as accounting costs. (d) opportunity costs. 83) BM07 \ D \ \ Implicit Costs \ 2 \ When economic profit equals zero, accounting profits: (a) are explicit costs of remaining in business. (b) will induce increased investment even if accounting costs are very low. (c) are also zero. (d) reflect normal returns on investment, which are implicit costs. (e) are equal to psychic income.
Ralph Byrns Chapter 7: Theory of the Firm Test Bank Two

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84) BM07 \ D \ \ Psychic Income \ 2 \ Economists view psychic income as an: (a) explicit cost of production. (b) implicit cost of production. (c) accountant's approach to profit. (d) implicit revenue reaped by the firm's owner. 85) BM07 \ C \ \ Goals of the Firm \ 2 \ The firms goal of profit maximization is most closely analogous to: (a) revenue maximization by Internal Revenue Agents. (b) maximization of a firms market share within an industry. (c) utility maximization by consumers. (d) vote maximization by politicians. 86) BM07 \ D \ \ Goals of the Firm \ 2 \ Assuming that competitive firms must seek maximum profits to survive means that: (a) firms dont make trial-and-error decisions. (b) every firm always seeks maximum profit and nothing else. (c) competition is extremely profitable. (d) None of the above. 87) BM07 \ E \ \ Goals of the Firm: Profit Maximization? \ 3 \ The assumption that firms try to maximize profits: (a) is the starting point for most economic analyses of how firms operate. (b) can be wrong for cases in which professional corporate managers maximize their own self interests instead of the interests of corporate stockholders. (c) leads to testable predictions about firms responses to economic changes. (d) can be wrong because entrepreneurs who open proprietorships face a trade-off between leisure and the funds they could make by working constantly. (e) All of the above. 88) BM07 \ C \ \ Competition \ 2 \ If markets are highly competitive, in the long run: (a) economic profits will be positive. (b) economic profits will be negative. (c) economic profits will be zero. (d) accounting profit will equal economic profit.

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89) BM07 \ C \ \ Institutions \ 2 \ Corporate giants are NOT immune to market pressures because: (a) they experience diseconomies of scale. (b) advertising reduces barriers to entry. (c) profits provide an incentive for new firms to enter a market. (d) consumers have tremendous brand loyalties. 90) BM07 \ A \ \ Mergers \ 2 \ Targeting for a hostile takeover is common when a firm has assets that are worth: (a) more than the total value of the corporations stock. (b) more than the total value of the corporations debt. (c) less than the total value of the corporations stock. (d) less than the total value of the corporations debt. 91) BM07 \ A \ \ Uncertainty and Decisionmaking \ 3 \ An error of omission would be: (a) the failure of an individual to invest in Microsoft twenty years ago. (b) an individual cheating on a test. (c) the decision by Ford to produce the Edsel. (d) an individuals decision to drink-and-drive. 92) BM07 \ C \ \ Uncertainty and Decisionmaking \ 3 \ An error of commission would be: (a) a student forgets to study for a test. (b) the decision not to produce a product that another company later produces successfully. (c) a company spending money on executive vacations instead of research and development. (d) a professor not preparing lecture notes. 93) BM07 \ A \ \ Principal-Agent Problems: Institutions \ 2 \ Modern corporate planning, according to John Kenneth Galbraith: (a) aims at reducing risks to managers of major firms. (b) stresses the maximization of profits. (c) is too concerned with social goals. (d) maximizes social welfare. 94) BM07 \ D \ \ Market Structure \ 2 \ John Kenneth Galbraith rejects theories that assume profit maximization in competitive markets. According to him, giant corporations dominate economic activity because: (a) corporate managers seek maximum profits for stockholders. (b) government policies are manipulated in favor of the public interest. (c) government expenditures are almost exclusively purchases from corporate giants. (d) small firms cannot afford the capital and modern technology needed for efficient economies of scale and scope.
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95) BM07 \ C \ \ Principal-Agent Problems \ 2 \ An example of the principal-agent problem would be: (a) a student failing an exam because he did not study. (b) a crook being caught because he made too much noise. (c) my son buying baseball cards with the money I gave him to buy milk for the family. (d) a woman divorcing her husband because he does not put the cap back on the toothpaste. 96) BM07 \ B \ \ Principal-Agent Problems \ 2 \ A business vice president uses company money to furnish an overly plush office. This is an example of: (a) corporate excess in America. (b) the principal-agent problem. (c) normal benefit to management. (d) profit maximization. 97) BM07 \ A \ \ Principal-Agent Problems \ 2 \ Attempts to resolve principal-agent problems between stockholders and top corporate managers (CEOs) include: (a) profit-sharing systems for top corporate managers. (b) programs to have low-level workers monitor each other. (c) recent federal legislation that limits the terms of office of corporate CEOs. (d) Boards of Directors setting extraordinarily high base salaries for corporate CEOs. 98) BM07 \ D \ \ Principal-Agent Problems \ 2 \ When someone paying for a service cannot completely monitor the behavior or motives of the person providing the service, there are potential inefficiencies and inequities caused by: (a) moral hazard. (b) utilitarianism. (c) adverse selection. (d) principal-agent problems.

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99) BM07 \ C \ \ Moral Hazard \ 2 \ Cameron is doing a research project on whale migration in the Pacific Ocean. To help with this research she hires a Ph.D. from MIT to create computer software to organize data, paying the software genius $150,000 up front for his services. The Ph.D. reassures Cameron that the software is progressing nicely and the research group will be very satisfied with Camerons final presentation. When the time comes for Cameron to present the software to her supporters, the computer software is less than what the computer genius promised because he has been working on other projects, and financial support for the research melts away. This is most clearly evidence of: (a) symmetric information. (b) adverse selection. (c) moral hazard. (d) consumer fraud. (e) a confidence scam. 100)BM07 \ A \ \ Moral Hazard \ 2 \ When stockholders who made large financial investments in Enron before the mid-1990s suffered enormous losses during 2001-2002 because of deceptive accounting practices and insider trading, they were the victims of a problem known as: (a) moral hazard. (b) adverse selection. (c) stock market risk. (d) bureaucratic gambling. 101)BM07 \ D \ \ Moral Hazard \ 2 \ Jared doesnt care about his job because he is eligible for unemployment compensation, so he frequently goofs off at work and shows up late. This is a problem of: (a) adverse selection. (b) efficiency wages. (c) symmetric information. (d) moral hazard. 102) BM07 \ D \ \ Moral Hazard \ 2 \ Moral hazards that generate shirking by employees can be partially remedied if firms adopt policies of: (a) efficiency wages. (b) hierarchical signaling. (c) careful screening by employers. (d) promotion strictly from within the company. (e) guaranteed job security in a union contract.

Ralph Byrns

Chapter 7: Theory of the Firm

Test Bank Two

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