Exam
Name___________________________________
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
1)
Suppose that you borrow $10,000 for two years, and at the end of the second year, you must repay
$11,664. The interest rate is
1)
A)
7.0 percent.
B)
16.7 percent.
C)
8.0 percent.
D)
9.0 percent.
2)
Juanita has just started a business and is using her personal car to deliver goods. The use of her car
is an example of
2)
A)
interest.
B)
an explicit cost to the business.
C)
an implicit cost to the business.
D)
financial capital.
3)
An advantage of a partnership over a proprietorship is
3)
A)
that profits are not taxed twice.
B)
the ability to take advantage of greater specialization.
C)
limited liability.
D)
that it is easier to dissolve.
4)
Economists also refer to the normal rate of return on investment as
4)
A)
the fixed cost of entrepreneurship.
B)
the opportunity cost of capital.
C)
the equity kicker.
D)
a residual cost.
5)
The person least likely to receive a payment from a corporation in a year of losses is the
5)
A)
bondholder.
B)
common stockholder.
C)
preferred stockholder.
D)
bank that loaned money to the corporation.
6)
Interest can be defined as
6)
A)
the return above opportunity cost paid to owners of a firm.
B)
the return paid to owners of capital.
C)
the amount of funds loaned to a creditor.
D)
the participation of a shareholder in the operations of a firm.
7)
Suppose a family–owned yogurt shop has $80,000 in total revenues, $36,000 in rent, and $20,000 in
additional operating costs. The husband and wife work in the shop and pay no wages to
themselves or others. The economic profits from the shop are
7)
A)
less than $24,000.
B)
$80,000.
C)
$24,000.
D)
more than $24,000.
8)
To find economic profit from accounting profit, it is necessary to
8)
A)
subtract dividends.
B)
add depreciation expense.
C)
add retained earnings.
D)
subtract the opportunity cost of capital.
9)
The three primary sources of corporate funds are
9)
A)
government, other corporations, and the central bank.
B)
banks, friends, and family.
C)
investment banks, brokerages, and insurance companies.
D)
stocks, bonds, and reinvestment of profits.
10)
Owner–provided capital and owner–provided labor are examples of
10)
A)
accounting costs.
B)
explicit costs.
C)
normal rate of return.
D)
implicit costs.
11)
The present value of a sum to be received in the future is greater
11)
A)
the greater the interest rate.
B)
the less the time period before receiving the sum.
C)
the greater the discount rate.
D)
the greater the inflation rate.
12)
One disadvantage of a partnership is
12)
A)
limited liability.
B)
it permits greater specialization.
C)
difficulty raising funds.
D)
lower monitoring costs.
13)
By definition, a proprietorship is
13)
A)
owned by many shareholders.
B)
managed by a large group called the “board of directors.”
C)
a large manufacturing concern.
D)
owned by a single individual.
14)
Accounting costs represent
14)
A)
long run costs only.
B)
opportunity costs.
C)
explicit costs paid by the firm.
D)
both sunk and future costs.
15)
Which legal claim has a fixed annual coupon payment?
15)
A)
Common stock
B)
Reinvestment
C)
Preferred stock
D)
Bond
16)
Accounting profits are
16)
A)
total revenue minus explicit costs.
B)
total revenue minus normal costs.
C)
total revenue minus implicit costs.
D)
total revenue minus explicit and implicit costs.
17)
A firm is considering an investment that will cost $2 million today and $2 million a year from now.
It will generate revenues of $1 million a year for five years, beginning two years from now. If the
interest rate is 10 percent, the firm should
17)
A)
make the investment because the project will generate a net profit of $1 million.
B)
not make the investment because the present value of the net revenues is less than $4 million.
C)
make the investment because the present value of the net revenues is greater than the present
value of the investment.
D)
not make the investment because the present value of the net revenues is less than the present
value of the investment spending.
18)
Which of the following would be most likely to receive high economic rent payments?
18)
A)
farmer
B)
factory worker
C)
professional baseball player
D)
doctor
19)
The disadvantages of proprietorships include
19)
A)
double taxation of business profits.
B)
the fact that the proprietorship can continue even after the owner dies.
C)
the fact that the proprietor is solely responsible for all the firm’s debts.
D)
limited liability for the owner.
20)
Suppose Jon Stewart of the “Daily Show” makes an annual income of $1,000,000. If he quit his
television job and went into producing he could make $400,000 per year. Jon Stewart’s opportunity
cost as a producer is
20)
A)
$1,400,000.
B)
$400,000.
C)
$600,000.
D)
1,000,000.
D
21)
In a partnership of two people
21)
A)
the law releases each partner from legal liabilities.
B)
it is more difficult to specialize with two persons than with one.
C)
each person has 50 percent liability.
D)
each person has unlimited liability.
D
22)
A business which is owned by two or more people is called a
22)
A)
partnership.
B)
proprietorship.
C)
corporation.
D)
none of the above.
A
23)
Corrina was working as a waitress in an Italian restaurant making an annual income of $25,000 per
year when she decided to start up her own catering business. Corrina used $10,000 of her savings
that was earning 5 percent annual interest to establish her business. After the first year she made an
accounting profit of $20,000. Her economic profit was
23)
A)
–$5,550.
B)
$25,000.
C)
$20,000.
D)
–$5,000.
A
C
24)
The nominal rate of interest is 4% and the anticipated rate of inflation is 1%. What is the real rate of
interest?
24)
A)
3%
B)
1%
C)
4%
D)
5%
25)
Which of the following is NOT a correct description of opportunity cost of capital?
25)
A)
It is an implicit cost.
B)
It is normally included in accounting costs.
C)
It is the normal rate of return on investment.
D)
It is the income sacrificed by not investing in another firm.
B
26)
The yield percentage of a stock is calculated as
26)
A)
the corporation’s net worth divided by the number of shareholders.
B)
the expected appreciation of the stock.
C)
the book value of the stock divided by the number of shareholders.
D)
the stock dividend divided by the price of the stock.
D
27)
Exchanges of stocks take place
27)
A)
in the principle financial city of each country, such as New York City for the United States
and London for England.
B)
in a decentralized fashion around the world.
C)
in centralized physical locations known as stock exchanges and online through Internet
brokers.
D)
in New York City only.
C
A
28)
In a partnership, debts accumulated by one partner are
28)
A)
the responsibility of all of the other partners, up to the total value of the firm.
B)
the responsibility of that partner only.
C)
the responsibility of all of the other partners for the full amount of the debt.
D)
the responsibility of that partner plus any partners who are actively involved in running the
partnership.
29)
A business owned by two or more joint owners, or partners, who share the responsibilities and the
profits of the firm and are individually liable for all the debts is a(n)
29)
A)
proprietorship.
B)
partnership.
C)
entrepreneur.
D)
corporation.
B
30)
Proprietorships are
30)
A)
responsible for most of the profits in the country.
B)
generally large relative to other business organizations.
C)
easy to form but difficult to dissolve.
D)
the most common form of business organization in the country.
D
31)
The funds used to purchase capital goods are called
31)
A)
financial capital.
B)
savings.
C)
dividends and interest.
D)
investment.
A
32)
What is the present value of $100 one–year from now at an interest rate of 6%?
32)
A)
$106
B)
$94.34
C)
$6
D)
$160
B
C
33)
If your business earns $10,000 in revenues, has explicit costs of $7,000, and implicit costs of $5,000,
your accounting profit is
33)
A)
–$2,000.
B)
$5,000.
C)
$3,000.
D)
$2,000.
34)
When a resource has a perfectly inelastic supply curve,
34)
A)
the amount of economic rent for this resource is determined by its supply.
B)
the amount of economic rent for this resource is determined by the government.
C)
the amount of economic rent for this resource is determined by demand for the resource.
D)
there is no economic rent being earned by this resource.
35)
A legal claim to a percentage of a company’s future profits and assets is known as a
35)
A)
dividend.
B)
bond.
C)
share of stock.
D)
random walk.
36)
When the rate of interest is 10 percent, the present value of $100 payable in two years is
approximately
36)
A)
$83.
B)
$100.
C)
$65.
D)
$117.
37)
The amount that must be paid to an individual to get them to invest in the industry is
37)
A)
a normal rate of return.
B)
the explicit costs.
C)
financial capital.
D)
reinvestment.
38)
All of the following are advantages of a corporation EXCEPT
38)
A)
double taxation.
B)
ability to raise large sums of financial capital.
C)
limited liability.
D)
unlimited life.
39)
A proprietorship is
39)
A)
not often found in developed economies, in which corporations have become the most
common form of business organization.
B)
taxed twiceonce when it pays business taxes and again when its owner pays personal
income taxes.
C)
difficult to form.
D)
risky for its owner, who is personally responsible for the firm’s debts.
40)
The goal of the firm is
40)
A)
profit maximization.
B)
to maximize sales.
C)
low labor turnover.
D)
to minimize costs.
41)
Pure economic rent is a payment to a resource that
41)
A)
has a perfectly inelastic supply.
B)
has a negative opportunity cost.
C)
has a perfectly elastic demand.
D)
has a high opportunity cost.
42)
When economic rent exists,
42)
A)
price is the same as the discount rate.
B)
resources are allocated inefficiently.
C)
the price is equal to the opportunity cost of the resources.
D)
resources are allocated efficiently.
43)
A difference between a proprietorship and a partnership is that
43)
A)
a proprietorship has only one owner while a partnership has only two owners.
B)
a partnership allows for specialization while a proprietorship does not.
C)
the profits in a proprietorship are taxed only once while in a partnership they are taxed twice.
D)
a proprietorship is easy to form while a partnership is hard to form.
44)
One role of the interest rate is to
44)
A)
discourage saving and encourage current consumption.
B)
reduce the rate of inflation by encouraging government borrowing.
C)
allocate capital to its most efficient uses.
D)
redistribute income from the wealthy to the poor.
45)
The nominal rate of interest is
45)
A)
not the rate observed in the market.
B)
expressed in dollars from the chosen base year.
C)
not adjusted for inflation.
D)
the rate observed in the market that includes an inflation premium.
46)
Larger loans, other things constant, have lower interest rates because
46)
A)
large loans always have collateral.
B)
the fixed costs associated with the handling charges as a percent of the total loan are less.
C)
only large, financially sound corporations obtain such loans.
D)
large loans are always for short time periods.
47)
A key assumption of Ricardo’s economic rent concept was that
47)
A)
land is always cheap and needs development.
B)
only land in large cities matters.
C)
all land is equally productive.
D)
land is too differentiated to be able to measure.
C
48)
Which of the following is not an advantage of a partnership?
48)
A)
Easy to form
B)
Profits are subject to only personal taxation
C)
Limited liability
D)
Permits more effective specialization in occupations
C
49)
A payment for the use of any resource over and above its opportunity cost is called
49)
A)
normal cost.
B)
economic rent.
C)
economic profit.
D)
accounting profit.
B
B
50)
Last year, the nominal interest rate was less than the anticipated rate of inflation.
50)
A)
This means that the real interest rate was very high.
B)
This scenario is not possible.
C)
This means that not enough loans were made by banks.
D)
This means that the real interest rate was negative.
51)
Corporations have a separation and control problem because
51)
A)
owners and managers frequently have different incentives.
B)
the shareholders control the firm.
C)
taxes are paid only by the board of directors.
D)
most of the profits are reinvested.
A
52)
What is the present value of $100 three years from now at an interest rate of 5%?
52)
A)
$86.38
B)
$90.70
C)
$115.76
D)
$85
A
53)
Efficient markets theory suggests that purchasing the published reports of financial analysts
53)
A)
is likely to increase one’s returns by an average of about 3 to 5 percent.
B)
is not likely to increase financial returns.
C)
will increase financial returns in the first year but not in following years.
D)
is likely to increase one’s returns by an average of 5 percent.
B
54)
Bond coupon payments represent
54)
A)
dividends paid to owners.
B)
payments to preferred shareholders.
C)
interest on the amount borrowed.
D)
capital gains for tax purposes.
C
D
55)
Economic profits are
55)
A)
total revenue minus explicit and implicit costs.
B)
total revenue minus accounting costs.
C)
total revenue minus explicit costs.
D)
total revenue minus implicit costs.
56)
The double taxation of corporate profit in the United States refers to the fact that
56)
A)
proprietorships are not subject to any tax on earnings.
B)
corporate profit is first taxed and then any dividends paid are subject to personal income tax.
C)
tax rates on partnerships are very high.
D)
depreciation is not a deductible expense.
57)
Financial capital is
57)
A)
assets of financial institutions.
B)
the foreign exchange market.
C)
the collection of stock and bond exchanges around the country.
D)
funds used to purchase capital goods.
58)
What is the relationship between accounting and economic profits?
58)
A)
There is no relationship between economic and accounting profits.
B)
Accounting profits are always larger than economic profits.
C)
Economic profits are always negative.
D)
Economic profits are always larger than accounting profits.
59)
Accounting profits are found by total revenues minus
59)
A)
explicit and implicit costs.
B)
implicit costs.
C)
explicit costs.
D)
all opportunity costs.
60)
What is the real (adjusted for inflation) present value of $104.25 that you could receive one year
from now, given that the rate of interest is 4.25 percent and the anticipated rate of inflation is 1
percent?
60)
A)
$100.00
B)
$100.97
C)
$107.64
D)
$99.05
Explanation:
61)
Which is the best example of a firm’s implicit costs?
61)
A)
Wages
B)
Taxes
C)
The opportunity cost of owner–provided labor
D)
Rent
Explanation:
62)
Suppose your donut shop earns $24,000 in total revenues per month with explicit costs of $12,000
and opportunity costs of $8,000. Your economic profit is
62)
A)
$4,000.
B)
zero.
C)
$12,000.
D)
$16,000.
Explanation:
Explanation:
63)
Which of the following is a TRUE statement about stock markets?
63)
A)
It is always better to buy growth stocks than the older and more stable blue–chip stocks.
B)
It is illegal for a friend of a corporate executive to make large profits in the stock market by
using his inside information.
C)
Economists can make above–average profits in the stock market because of their specialized
knowledge of economics.
D)
The stock market on average over time is random and totally unrelated to the performance of
the economy.
64)
A disadvantage of corporations over a proprietorship or partnership is in the
64)
A)
taxation system.
B)
ability to raise funds.
C)
legal liability.
D)
future of the firm when an owner dies.
65)
An advantage of proprietorships is
65)
A)
their ability to raise large amounts of equity capital.
B)
the fact that their profits are not taxed.
C)
the breadth of management expertise that comes from having a board of directors.
D)
the ease with which they can be formed and dissolved.
66)
A business organization that employs resources to produce goods and services for profit is
66)
A)
inside information.
B)
economic rent.
C)
a firm.
D)
the opportunity cost of capital.
67)
The theory that there is no way to “get rich quick” in securities due to a lack of predictable trends is
67)
A)
no–win theory.
B)
trading.
C)
market trend analysis.
D)
random walk theory.
68)
Let us suppose that if Oprah Winfrey was not a superstar she would have been a judge making
$100,000 per year. If she makes $63 million dollars this year, her opportunity cost is
68)
A)
$62.9 million.
B)
$100,000.
C)
$63.1 million.
D)
$63.0 million.
69)
Suppose you own $15,000 of personal property, $5,000 of stock in ABC Corporation, a $1,000
certificate of deposit, and $10,000 of government bonds. If ABC goes bankrupt, the most you could
lose is
69)
A)
$15,000.
B)
$26,000.
C)
$5,000.
D)
$31,000.
70)
When the anticipated rate of inflation declines, the real rate of interest
70)
A)
decreases.
B)
increases.
C)
is not affected.
D)
increases exponentially.
71)
Accounting profits are total revenues minus
71)
A)
explicit costs and all other relevant opportunity costs.
B)
explicit and implicit costs.
C)
all relevant opportunity costs.
D)
explicit costs.
72)
Joanne left her last job, in which she was earning $50,000, in order to form her own consulting
business. Her revenues for the first year of consulting were $210,000. During that year, she hired
two assistants for $25,000 each and spent $25,000 on office equipment. In addition, she incurred
$75,000 in miscellaneous expenses. Her accounting profit that first year was
72)
A)
$50,000.
B)
$210,000.
C)
$10,000.
D)
$60,000.
73)
Economic rent is any payment
73)
A)
below that of a normal profit or return.
B)
in excess of the resource’s opportunity cost.
C)
received by the owner of a resource with a supply curve that is not horizontal.
D)
received by the owner of a resource in perfectly elastic supply.
74)
Supermodel Linda Evangelista has been quoted as saying, “[I] don’t wake up for less than $10,000 a
day.” If Ms. Evangelista is paid $15,000 for her next daylong photo shoot, then
74)
A)
she is receiving economic rent to labor equal to $5,000.
B)
the entire $15,000 would be considered economic rent to labor.
C)
she is being paid $15,000 to cover her opportunity cost.
D)
the first $10,000 she receives is economic rent to labor and the next $5,000 is more economic
rent.
75)
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 $7 per item.
We can conclude that the firm‘s
75)
A)
accounting profit was $1000, and economic profit was –$1,500.
B)
accounting and economic profits were both $1000.
C)
accounting profit was –$500, and economic profit was $1,000.
D)
accounting profit was $1,000, and its economic profit was –$500.
76)
The British economist most often associated with the issue of economic rent for land was
76)
A)
John Maynard Keynes.
B)
Jeremy Bentham.
C)
David Ricardo.
D)
A. W. Phillips.
77)
A shareholder in a corporation
77)
A)
may not sell his or her share of ownership in the business without the business dissolving.
B)
is a part owner of the business.
C)
is personally liable for the debts of the corporation.
D)
can earn interest, but not dividends, from the profits of the business.
78)
Which of the following options is NOT a characteristic of a proprietorship?
78)
A)
Double taxation
B)
Single ownership
C)
Unlimited liability
D)
Easy to form and dissolve
79)
Economic profit is always
79)
A)
equally likely to be either greater or less than accounting profit.
B)
less than accounting profit.
C)
greater than accounting profit.
D)
equal to accounting profit.
80)
Let us suppose that if Oprah Winfrey was not a superstar she would have been a judge making
$100,000 per year. If she makes $63 million dollars this year, her economic rent is
80)
A)
$100,000.
B)
$62.9 million.
C)
$63.1 million.
D)
$63.0 million.