Entrepreneurship and Effective Small Business Management, 11e (Scarborough)
Chapter 23 The Legal Environment: Business Law and Government Regulation
1) Something of legal value that the parties exchange as part of a bargain.
A) Contract
B) Legality
C) Agreement
D) Consideration
Topic: Laws of Contract
AACSB: Analytic Skills
2) A contract entered into by a(n) ________ person can be void, voidable, or valid, depending on
the mental state of the person.
A) minor
B) insane
C) intoxicated
D) All of the above
Topic: Contractual Capacity
AACSB: Analytic Skills
3) What are, if any, the possible defenses against a valid contract which may cause it to be
unenforceable?
A) Genuineness of assent and form
B) Control and offer
C) Agreement and legal
D) Agreement and offer
Topic: Genuineness of Assent and Form of Contracts
AACSB: Analytic Skills
4) ________ law governs the rights and the obligations between people and the parties they
made promises to or agreements with.
A) Agency
B) Contract
C) Freedom of contract
D) UCC
Topic: The Law of Contracts
AACSB: Analytic Skills
1
5) A(n) ________ is a promise or a set of promises for the breach of which the law gives a
remedy, or the performance of which the law recognizes as a duty.
A) agreement
B) UCC
C) warranty
D) contract
Topic: The Law of Contracts
AACSB: Analytic Skills
6) To have an agreement, a contract must have:
A) a promise by one party to do something in the future.
B) the ability to contract.
C) an intention to be bound by the contract.
D) an offer and an acceptance.
Topic: Agreement
AACSB: Analytic Skills
7) To have a valid offer, there must be:
A) an intention to be bound by the offer.
B) a simple lack of disagreement by the offeree.
C) a written communication of the offer.
D) significant and substantial consideration.
Topic: Offer
AACSB: Analytic Skills
8) The terms of the ________ must be defined and reasonably certain.
A) offer
B) consideration
C) payment
D) None of the above
Topic: Offer
AACSB: Analytic Skills
2
9) On October 1, Althea writes Katherine a letter offering her a job at her travel agency.
Katherine mails Althea a letter on October 2 accepting the offer. On October 3, before she
receives Katherine’s acceptance, Althea calls Katherine to rescind the offer. In terms of contract
law:
A) there is no contract since Althea calls to rescind the offer before she receives Katherine’s
acceptance.
B) a contract is formed on October 2 when Katherine mails the letter of acceptance to Althea.
C) no contract is formed since Katherine does not respond by the fastest means available—
telephone.
D) None of these are correct.
Topic: The Law of Contracts
AACSB: Reflective Thinking
10) Maria writes a letter offering to sell some office furniture to Lee. Lee, in a distant city, sends
a telegram to Maria accepting the offer. Because of an error in the Western Union Office, the
telegram never reaches Maria. What is the result?
A) There is no contract since Lee responds by telegram instead of by mail.
B) There is no contract since Maria never actually receives Lee’s acceptance.
C) A contract is formed as soon as Lee gave the telegram to the Western Union office.
D) A contract is formed as soon as Maria writes the letter to Lee.
Topic: The Law of Contracts
AACSB: Reflective Thinking
11) The courts use the presence or absence of a(n) ________ to distinguish between serious
promises and those that are not serious.
A) consideration
B) contractual capacity
C) agreement
D) written communication
Topic: The Law of Contracts: Consideration
AACSB: Analytic Skills
3
12) The ________ rule says that an offeree’s acceptance must be the mirror image of the offeror’s
offer.
A) mirror image
B) promissory estoppel
C) mailbox
D) consideration
Topic: The Law of Contracts
AACSB: Reflective Thinking
13) In most cases dealing with the issue of consideration, courts:
A) still consider a promise binding even if made without a consideration.
B) do not evaluate the adequacy of the consideration.
C) consider offers of “love and affection” to be valuable consideration.
D) weigh the value of the consideration in ruling on the validity of the contract.
Topic: The Law of Contracts
AACSB: Analytic Skills
14) In terms of contractual capacity:
A) a minor can disaffirm and walk away from a contract even if already executed and the minor
has benefited from it.
B) intoxicated individuals are generally always held liable for their contractual obligations,
regardless of their condition upon execution of the contract.
C) an insane person can never have contractual capacity by definition.
D) if a minor benefits from a contract and then disaffirms it, he/she must fulfill the duty of
restoration.
Topic: The Law of Contracts: Contractual Capacity
AACSB: Analytic Skills
15) Al voluntarily becomes intoxicated at a local bar. He sells his car for half of its value simply
to irritate his wife. Later when sober, Al and his wife want the car back. This contract:
A) is void because of a lack of genuineness of assent.
B) is voidable.
C) is unenforceable due to duress and undue influence.
D) cannot be voided by Al or his wife.
Topic: The Law of Contracts
AACSB: Reflective Thinking
4
16) Rupert, a very old man, suffers from bouts of senility. During a lucid moment, he contracts to
buy a new freezer from a local appliance dealer. This contract is:
A) void.
B) voidable.
C) enforceable.
D) illegal.
Topic: The Law of Contracts
AACSB: Analytic Skills
17) Toni wants to buy software from Bill that she can modify in order to hack into her
boyfriend’s e-mail account to see if he’s writing to another woman. When Bill discovers why
Toni wants the software, he refuses to sell it to her. Toni sues Bill in small claims court. Is the
contract valid?
A) Yes, because a verbal contract is binding.
B) No, because of the principle of legality.
C) Yes, because of promissory estoppel.
D) No, because Toni is clearly crazy.
Topic: Sales and Sales Contracts
AACSB: Reflective Thinking
18) The owner of a small auto repair shop knowingly installs a used water pump in your car and
tells you it is “brand new.” This is:
A) fraud.
B) duress.
C) innocent misrepresentation.
D) breach of contract.
Topic: Sales and Sales Contracts
AACSB: Analytic Skills
19) ________ serves as a check on the parties’ agreement, verifying that it is genuine and not
subject to mistakes, misrepresentation, fraud, duress, or undue influence.
A) An attorney
B) Notary public
C) Genuineness of assent
D) None of the above
Topic: Genuineness of Assent and Form of Contracts
AACSB: Analytic Skills
5
20) Which of the following statements is correct?
A) A service mark is any distinctive word, phrase, symbol, or trade dress that a company uses to
identify the origin of a product or to distinguish it from other goods on the market.
B) A trademark is any distinctive word, phrase, symbol, design or trade dress that a company
uses to identify the origin of a product or to distinguish it from other goods on the market.
C) A service mark identifies and distinguishes the source of a service.
D) Both B and C
Topic: Trademarks
AACSB: Analytic Skills
21) Sonny is buying a computer system for his college’s administrative functions. The negotiated
price of the system is $475, 000. He receives a contract for $375,000 with no explanation as to
the change and gladly signs it and sends it back to the vendor. He receives a phone call from the
vendor explaining that the secretary in typing the figures into the contract hit the 3 instead of the
4 on her keyboard. Sonny wants to hold the vendor to the contract. Is the contract legally binding
on the contractor?
A) Yes, because it constitutes a written offer.
B) No, because of a lack of genuineness of assent on the part of the vendor.
C) Yes, because of the law of agency covers the secretary as well as the salesperson.
D) No, because this constitutes a mistake of fact that Sonny should have immediately
recognized.
Topic: Sales and Sales Contracts
AACSB: Reflective Thinking
22) Jack started his business in the year 2000. Due to lack of planning and bad cash flow, Jack
files for bankruptcy and the business ceases to exist. This is a form of:
A) liquidation.
B) reorganization.
C) repayment plan.
D) temporary repayment plan.
Topic: Forms of Bankruptcy
AACSB: Reflective Thinking
6
23) Gusti agrees to maintain Mrs. Poppendraius’s yard, pulling weeds, cutting the grass weekly,
and trimming the shrubbery once during the summer for $30 a month. Gusti makes a half-hearted
attempt at pulling weeds, cuts the lawn once all summer and never touches the shrubbery. No
damage is done except that Mrs. Poppendraius’s yard appears neglected and unkempt. In terms of
contract law:
A) Gusti is not contractually obligated because he is a minor.
B) Mrs. Poppendraius may collect compensatory damages.
C) Gusti is in breach of contract.
D) Mrs. Poppendraius may collect consequential damages.
Topic: Breach of Sales Contracts
AACSB: Reflective Thinking
24) The damages the parties to a contract specify in case of breach are called:
A) liquidated damages.
B) monetary damages.
C) compensatory damages.
D) consequential damages.
Topic: Breach of Sales Contracts
AACSB: Analytic Skills
25) ________ is a remedy for breached contracts that deal with unique items and is designed to
make the injured party “whole again.”
A) Consequential damage
B) Specific performance
C) Remedy at law
D) Monetary damage
Topic: Breach of Sales Contracts
AACSB: Analytic Skills
26) Which of the following contracts would be covered by the Uniform Commercial Code?
A) The sale of accounting services
B) The sale of real estate
C) The sale of furniture
D) All of the these
Topic: The Uniform Commercial Code
AACSB: Analytic Skills
7
27) The Uniform Commercial Code:
A) significantly revised Merchant Law.
B) is based on case law and overturns much of the common law that merchant law was based on.
C) makes minor changes to merchant law, largely making the law more uniform and consistent.
D) is the most significant revision of commercial law since the Napoleonic Code.
Topic: The Uniform Commercial Code
AACSB: Analytic Skills
28) Ansel, a sugar manufacturer, agrees to sell Keith 10,000 pounds of sugar at the “usual price.”
A shortage forces the price of sugar up and Ansel charges Keith nearly 50% more for the sugar.
In response, Keith disaffirms the contract. Which ruling is correct?
A) The modification is enforceable because Ansel has the right to unilaterally modify the
contract.
B) The Code would confirm the contract and assign a price reasonable at the time of shipment.
C) Keith would be permitted to void the contract since he has not agreed to the price increase.
D) This contract is not covered by the Code, therefore, the common law applies and the
modification is unenforceable.
Topic: The Uniform Commercial Code
AACSB: Reflective Thinking
29) The UCC requires that:
A) the sale of all goods and services be warranted.
B) only written contracts for the sales of goods over $1,500 are enforceable.
C) verbal contracts are as enforceable as written contracts, regardless of the amount of the
consideration.
D) no new consideration need be offered if a contract is modified in good faith.
Topic: The Uniform Commercial Code
AACSB: Analytic Skills
30) What type of warranty does a seller create when making statements about the condition,
quality, and performance of the good that the buyer substantially relies on?
A) Sales warranty
B) Verbal warranty
C) Express warranty
D) Warranty of merchantability
Topic: Sales Warranties and Product Liability
AACSB: Analytic Skills
8
31) If a contract for the sale of goods omits the place for delivery, the Code states that delivery
will take place at:
A) the seller’s place of business.
B) the seller’s residence.
C) the buyer’s place of business.
D) the buyer’s residence.
Topic: Sales and Sales Contracts
AACSB: Analytic Skills
32) Under the UCC, when the innocent specifies their own damages for a potential breach of a
sales contract and they are reasonable and not punitive, these damages are called:
A) consequential damages.
B) liquidation damages.
C) compensatory damages.
D) specific damages.
Topic: Breach of Sales Contracts
AACSB: Analytic Skills
33) A(n) ________ insures a buyer that the goods will be of average quality and that they are fit
for the ordinary purposes for which such goods are used.
A) implied warranty of merchantability
B) implied warranty of fitness for a particular purpose
C) express warranty
D) warranty of title
Topic: Sales Warranties and Product Liability
AACSB: Analytic Skills
34) The statute of limitations for a breach of contract suit is ________ years from the time the
breach occurred.
A) 2
B) 3
C) 4
D) 7
Topic: Breach of Sales Contracts
AACSB: Analytic Skills
9
35) A ________ is a promise or statement of fact by the seller about a product.
A) sales warranty
B) sales contract
D) contractual capacity
Topic: Sales Warranties and Product Liability
AACSB: Analytic Skills
36) A(n) ________ assures the buyer of a product that it will be of average quality, not the best
and not the worst.
A) implied warranty
B) warranty of exclusivity
C) express warranty
D) warranty of merchantability
Topic: Sales Warranties and Product Liability
AACSB: Analytic Skills
37) Which of the following phrases is sufficient to disclaim an implied sales warranty?
A) “No warranties”
B) “Seller makes no warranties on this product whatsoever”
C) “As is”
D) None of the above. A merchant cannot disclaim sales warranties.
Topic: Sales Warranties and Product Liability
AACSB: Analytic Skills
38) Today, when it comes to product liability, the courts:
A) practice the caveat emptor rule.
B) rule that the scope of warranties include any person incurring personal or property loss due to
a faulty product.
C) hold that the rule of caveat venditor is valid in all cases.
D) hold that only the parties directly involved in the execution of the contract are bound by the
law of sales warranties.
Topic: Sales Warranties and Product Liability
AACSB: Analytic Skills
10