Microeconomics, 4e – Testbank 2 (Hubbard)
Chapter 8 Firms, the Stock Market, and Corporate Governance
8.1 Types of Firms
1) A firm in a market economy must do all of the following to succeed except
A) produce the goods and services that consumers want at a lower cost than consumers
themselves can produce.
B) organize the factors of production into a functioning, efficient unit.
C) have access to sufficient funds.
D) be organized as a corporation.
2) How has organizing a successful firm in a market economy changed over the last century?
A) It has become easier as more and more firms discover how to do it.
B) As government intervention has decreased, firms now have more freedom.
C) There has been no change one way or the other over the last century.
D) It has become more difficult to organize an efficient and successful firm.
3) Facebook is an example of a private firm. As a private firm, Facebook is
A) not subject to government regulations and taxation.
B) run by stockholders and a board of directors.
C) run by its founder, Mark Zuckerberg.
D) not legally allowed to raise funds through venture capital firms.
4) What type of business is the easiest to set up?
A) sole proprietorship
B) partnership
C) corporation
D) There is no difference in the ease of establishment.
5) Anything of value owned by a person or a firm is
A) an asset.
B) a liability.
C) wealth.
D) owner’s yield.
6) A corporation is
A) the easiest type of business to set up.
B) the least expensive type of business to set up.
C) the most difficult type of business to set up.
D) the least profitable type of business to set up.
7) Which type of business has the most government rules and regulations affecting it?
A) sole proprietorship
B) partnership
C) corporation
D) They all have the same set of rules and regulations affecting them.
8) Of the different types of businesses, a corporation has the ________ government rules and the
________ government regulations affecting it.
A) least; least
B) least; most
C) most; least
D) most; most
9) What is the primary difference between a sole proprietorship and a partnership?
A) Proprietorships have unlimited liability while partnerships have limited liability.
B) Partnerships can issue stocks and bonds while proprietorships cannot.
C) Partnerships have more owners than do proprietorships.
D) There is no real difference between the two types of firms.
10) Which of the following statements is false?
A) Corporations can issue stocks and bonds, while proprietorships cannot.
B) Corporations have one owner, while proprietorships have many owners.
C) Corporations face more taxes than do proprietorships.
D) Proprietorships have unlimited liability while corporations have limited liability.
11) Assume you set up a sole proprietorship and your lawyer tells you that as the owner you will
face unlimited liability. What does that mean?
A) You are liable for organizing the business.
B) You could stand to lose your personal wealth if the business goes bankrupt.
C) There is no legal responsibility of the business in case a customer sues, as the business is
legally untouchable.
D) None of these explain what unlimited liability means.
12) Who controls a partnership?
A) stockholders
B) bondholders
C) the owner s
D) all of these
13) Who owns a corporation?
A) the board of directors
B) the stockholders
C) the employees
D) the CEO
14) How do the owners of a partnership relate to the business?
A) The owners and the business are not separate legal entities.
B) The owners and the business are separate legal entities.
C) The assets of the owners are considered separate from the asset of the business.
D) None of these describe the legal relationship of the owners to the business.
15) In a typical year, ________ new firms open in the United States.
A) more than 600,000
B) more than 1 million
C) less than 200,000
D) approximately 125,000
16) On average, jobs at small firms pay ________ wages than jobs at large firms and are
________ likely to offer fringe benefits such as health insurance and retirement accounts.
A) higher; more
B) lower; more
C) higher; less
D) lower; less
17) How does the owner of a corporation relate to the business?
A) The owners of the business have a separate legal distinction from the business.
B) The owners of the business have no separate legal distinction from the business.
C) The personal assets are part of the corporation’s assets.
D) None of these describe the legal relationship of corporate owners to the business.
18) If the personal assets of the owners cannot be claimed if the business is bankrupt, the owners
are said to have
A) unlimited liability.
B) a proprietorship type of business.
C) limited liability.
D) a partnership type of business.
19) Which of the following is not an advantage of starting a new business as a proprietorship?
A) The owner has complete control over the business.
B) A proprietorship has few government rules and regulations to comply with.
C) Business profits are only taxed once, not twice.
D) A proprietorship can easily attain additional funding.
20) Jeremy is thinking of starting up a small business selling NASCAR memorabilia. He is
considering setting up his business as a corporation. What is one advantage to Jeremy of setting
up his business as a corporation?
A) By setting up the business as a corporation, Jeremy would not face double taxation.
B) By setting up the business as a corporation, Jeremy would have the ability to share risk with
shareholders.
C) By setting up the business as a corporation, Jeremy would have both ownership and control
over the business.
D) All of the above would be advantages of setting up his business as a corporation.
21) Jeremy is thinking of starting up a small business selling NASCAR memorabilia. He asks his
friend, Carmen, if she’d like to join him in setting up a partnership to start the business. What is
one disadvantage in joining the partnership that Carmen should consider?
A) Carmen should realize that profits in the partnership will be reduced by dividend payments to
shareholders.
B) Carmen should realize that, as an owner of the business, she will be personally responsible for
the debts of the business.
C) Carmen should realize that the profits of the business will also be taxed as dividend income,
so she faces the potential for double taxation of that business income.
D) Carmen should realize that the Jeremy will have complete control over the business because it
was his idea.
22) Which of the following is an advantage of starting a new business as a corporation?
A) double taxation
B) ease in setting up
C) low expenses of legally organizing
D) greater ability to raise funds
23) In the United States, corporate profits are taxed
A) only at the corporate level.
B) only when investors receive dividends.
C) at both the corporate level and when investors receive dividends.
D) neither at the corporate level nor when investors receive dividends.
24) What is the most common type of business?
A) corporation
B) partnership
C) sole proprietorship
D) They are equally represented because of Federal laws.
25) A partnership is ________ type of business.
A) the most common.
B) the least common
C) the least risky
D) the most profitable
26) Which type of businesses earns the majority of revenues in the United States?
A) corporations
B) partnerships
C) sole proprietorships
D) none of these
27) As a business type, corporations ________ in the United States.
A) earn the majority of profits
B) are the most common
C) are the least common
D) are subject to the least amount of taxes
28) Who controls a sole proprietorship?
A) owner
B) stockholders
C) bondholders
D) employees
29) When a business is set up as a sole proprietorship, the owner of the business faces unlimited
liability.
30) The only type of business that faces unlimited liability is a sole proprietorship.
31) In the United States, partnership profits are taxed at the business level and then are taxed
again as personal income in the form of dividend payments.
32) Define a sole proprietorship.
33) Define a corporation.
34) What are the advantages of setting up a proprietorship or partnership as opposed to a
corporation?
35) In which types of business do owners have unlimited personal liability and in which do
owners have limited personal liability?
1) A member of a corporate board of directors that is also a manager of the business is known as
A) a shareholder.
B) an inside director.
C) a partner.
D) a corporate governor.
2) The way in which a corporation is structured and the impact a corporation’s structure has on
the firm’s behavior is referred to as
A) corporate taxation.
B) structure composition theory.
C) structural behavior.
D) corporate governance.
3) A corporation’s management
A) owns the corporation.
B) hires the board of directors.
C) are liable for the corporation’s debts.
D) operates and controls a corporation in its day-to-day activities.
4) Who hires the managers of a corporation?
A) the board of directors
B) stockholders
C) managers
D) employees
5) Stockholders
A) are liable for the debts of a corporation.
B) are the owners of a corporation.
C) control a corporation’s day-to-day activities.
D) hire the managers of a corporation.
6) Who selects the board of directors of a corporation?
A) the state where the corporation is chartered
B) employees
C) stockholders
D) managers
7) Economists refer to the conflict between the interests of shareholders and the interests of top
management as
A) a stock-equity problem.
B) a liability problem.
C) a principal-agent problem.
D) a financial intermediary problem.
8) In many corporations, there is “separation of ownership from control.” What does this mean?
A) The shareholders control the corporation, although the board of directors owns the
corporation.
B) The managers of the corporation run the corporation, although the shareholders own the
corporation.
C) The board of directors controls corporate operations, although the managers of the
corporation own the corporation.
D) Top corporate managers only make decisions that have been approved unanimously by
shareholders.
9) What can be done to deal with the principal-agent problem?
A) threaten to liquidate the firm
B) link top manager salaries to the profits of the firm or the price of the firm’s stock
C) have the CEO be a rotating position
D) forbid managers from owning any company stock
10) The existence of ________ increases the risk of buying stock in a corporation.
A) the principal-agent problem
B) corporate governance
C) unlimited personal liability
D) employee-owned corporations
11) Steve Ballmer is the Chief Executive Officer of Microsoft as well as a member of
Microsoft’s board of directors. Ballmer is therefore classified as an
A) inside director.
B) outside director.
C) independent director.
D) unbiased director.
12) Included on the board of directors of Microsoft are Reed hastings, the founder of Netflix, the
president of Harvey Mudd college Maria M. Klawe, and the vice chairman of Bank of America
Charles H. Noski. These three board members do not have a direct management role with
Microsoft and are therefore referred to as
A) inside directors.
B) outside directors.
C) competitive directors.
D) honorary directors.
13) Some corporate governance experts believe that serving on a company’s board of directors
for an extended length of time diminishes that member’s independence from the company’s CEO.
If this is true, it would tend to
A) reduce the principal-agent problem.
B) increase the principal-agent problem.
C) be in the best interest of shareholders.
D) have no impact on the company’s performance, since the CEO is only one member of top
management.
14) Corporate managers and shareholders always have the same goals.
15) Members of management serving on the board of directors of a corporation are referred to as
outside directors.
16) Who decides who controls a corporation?
17) What is corporate governance?
18) How does the principal-agent problem extend to managers and employees?
19) How can a corporation’s board of directors and its managers try to reduce the principal-agent
problem?
8.3 How Firms Raise Funds
1) A proprietorship or partnership can raise funds for expansion in all of the following ways
except
A) borrowing from someone or an institution willing to lend the funds.
B) reinvesting profit back into the business.
C) taking on a partner or more partners.
D) issuing stock through financial markets.
2) What is the central role of financial intermediaries in a market economy?
A) the creation and printing of money
B) keeping the price level stable
C) bringing together savers and borrowers
D) providing safe deposit boxes for people and businesses
3) Raising funds through financial intermediaries is called
A) direct finance.
B) corporate finance.
C) indirect finance.
D) dividend reinvestment.
4) Which of the following does not take place in the direct finance market?
A) Ownership in corporations is sold in the form of common stock.
B) Deposits from savers are accumulated and loans made to borrowers.
C) Ownership in corporations is sold in the form of preferred stock.
D) Corporate bonds are sold to savers.
5) If Abercrombie & Fitch borrows $8 million from a bank to finance the construction of a new
store, this is an example of
A) a stock market transaction.
B) direct finance.
C) a bond market transaction.
D) indirect finance.
6) Abercrombie & Fitch wants to raise $8 million to finance the construction of a new store, and
the company wishes to raise the funds through direct finance. Which of the following methods
could it use?
A) It could sell $8 million in bonds.
B) It could borrow $8 million from a bank.
C) It could issue $8 million in stocks.
D) It could choose either A or C.
7) A financial security that represents a promise to repay a fixed amount of funds is a
A) share of stock.
B) coupon.
C) dividend.
D) bond.
8) Dividends are
A) financial securities which represent ownership in a corporation.
B) the yearly payments associated with bonds.
C) the interest rate paid on shares of stock.
D) payments by a corporation to its shareholders.