42) Proprietorships, partnerships, and corporations are the primary forms of
A) industries.
B) business organization.
C) principal-agent relationships.
D) command-incentive relationships.
43) Which of the following are characteristics of a proprietorship?
I. Single owner
II. Limited liability
A) I only
B) II only
C) both I and II
D) neither I nor II
44) A proprietorship is a firm with
A) two or more owners who both have unlimited liability.
B) a single owner who has limited liability.
C) a single owner who has unlimited liability.
D) many owner all of whom have limited liability.
45) The main disadvantage to organizing a business as a proprietorship is
A) its complex management structure.
B) limited liability.
C) unlimited liability.
D) that economic profit cannot be maximized.
46) The owner of a proprietorship has ________ liability and ________ required to use all of his
or her entire wealth to pay for the firm’s losses.
A) limited; might be
B) limited; is not
C) unlimited; might be
D) unlimited; is not
47) The legal responsibility for losses incurred by a proprietorship falls upon the
A) stockholders.
B) partners.
C) owner.
D) creditors.
48) A major disadvantage of a proprietorship is that the ________.
A) owner’s entire wealth is at risk
B) profits are taxed twice
C) firm has perpetual life
D) owner has limited liability
49) The profits of a proprietorship are
A) taxed at the same rate as the owner’s other personal income.
B) subject to a corporate tax.
C) taxed as capital gains indexed for inflation.
D) exempt from taxation.
50) Owners of ________ have unlimited liability.
A) partnerships and corporations
B) corporations
C) proprietorships and partnerships
D) partnerships, proprietorships, and corporations
51) A firm with two or more owners who have unlimited liability is known as
A) a partnership.
B) a proprietorship.
C) a corporation.
D) an establishment.
52) As owner of a one-third share of a partnership, Josh is legally liable for
A) none of its debts.
B) one-third of its debts.
C) all of its debts.
D) all of its taxes but none of its private debt.
53) Fatz Confectionery is a candy company that operates at the risk of unlimited liability for its
many owner in case, for instance, all of its former employees win a class action lawsuit because
of “sugar-lung” developed over decades of working there. Thus Fatz is a
A) proprietorship.
B) partnership.
C) either of the above.
D) neither of the above.
54) Smith’s Shoes is a failed business enterprise, with debts of $10 million. Steve Smith has an
ownership stake in Smith’s shoes. Which of the following statements INCORRECTLY
characterizes Steve Smith’s legal liability for the debts of Smith’s Shoes, depending on the firm’s
type of business organization?
A) If Smith’s Shoes is a proprietorship, then Steve Smith is fully liable for the entire $10 million
in debt of the failed shoe store.
B) If Steve Smith is a partner in Smith’s Shoes, then his legal liability for the debts of Smith
Shoes is $10 million divided by the number of partners.
C) If Smith’s Shoes is a corporation in which Steve Smith is a stockholder, then Steve Smith
does not need to use any of his wealth to pay the debt because the company has limited liability.
D) None of the above statements is incorrect.
55) The profits of a partnership are
A) taxed as personal income.
B) subject to a corporate tax.
C) taxed as capital gains indexed for inflation.
D) exempt from taxation.
56) An advantage of a partnership over a corporation is that
A) a partnership’s profits are taxed only once, while retained profits of a corporation are taxed
twice.
B) a partnership’s owners usually have limited liability, while the entire wealth of owners of a
corporation is at risk.
C) a partnership has a perpetual life, while a corporation dies with its owners.
D) a partnership’s cost of capital is low relative to that of a corporation.
57) A corporation is a firm owned by
A) two or more owners who have unlimited liability.
B) a single owner who has unlimited liability.
C) at least 20 stockholders who have partially limited liability.
D) stockholders who have limited liability.
58) Which types of firms have limited liability?
A) corporations
B) corporations and partnerships
C) partnerships
D) proprietorships
59) An advantage of the corporate form of organization is that
A) the management structure is usually simple.
B) owners have limited liability.
C) owners have unlimited liability.
D) a corporation cannot go bankrupt.
60) A firm that has limited liability is classified as a
A) proprietorship.
B) partnership.
C) partnership or proprietorship.
D) corporation.
61) Owners of a proprietorship have ________ liability and stockholders in a corporation have
________.
A) limited; limited
B) limited; unlimited
C) unlimited; unlimited
D) unlimited; limited
62) Which of the following types of business organization have limited liability?
I. proprietorship
II. partnership
III. corporation
A) I, II only
B) II, III only
C) III only
D) I, II, III
63) Which of the following businesses have limited liability?
A) Mainline Texaco, a gas station downtown with Frank Jones as proprietorship
B) Fakker, Chayse, and Blaimm, partners in medical malpractice law
C) StrideRite Shoe Company, Inc., a corporation that produces shoes
D) Both answers B and C are correct.
64) Paul and Wayne are starting a consulting firm together. Their liability is limited; therefore,
their firm is an example of a
A) partnership.
B) proprietorship.
C) corporation.
D) None of the above answers is correct.
65) The limited liability enjoyed by Jitters Coffee Company Corporation is a benefit that protects
A) its employees.
B) its Board of Directors.
C) its stockholders.
D) all of the above
66) Last Tuesday you purchased 100 shares of Jitters Coffee Company, a corporation, for $25.00
per share. Unfortunately, the company went bankrupt later that same day. If the company still
owed $1 million in debts after all assets have been liquidated and there are 1 million
stockholders, what would be your personal loss from the remaining debt?
A) $0
B) $1.00
C) $100.00
D) $1 million
67) An advantage of the corporate form of organization is that
A) owners have joint unlimited liability.
B) owners have limited liability.
C) owners have individual unlimited liability.
D) creditors have unlimited liability.
68) The stockholders of a corporation have ________ liability and ________ required to pay all
of the firm’s losses.
A) limited; are
B) limited; are not
C) unlimited; are
D) unlimited; are not
69) The owner of a proprietorship might decide incorporate the firm as a corporation in order to
A) be able to conduct business in more than one county.
B) avoid the principal-agent problem.
C) be eligible for patent protection of new products.
D) gain limited liability.
70) An advantage of the corporation over other forms of business organization is that
A) the owners have unlimited liability.
B) a corporation’s profits are taxed only once.
C) large-scale, low-cost capital is more readily available.
D) the decision-making structure is simple.
71) Which of the following about corporations is TRUE?
A) The cost of capital and labor is high relative to that paid by a proprietorship.
B) Profits are taxed only once as the owners’ income.
C) The owners’ entire wealth is at risk.
D) Corporations’ profits are taxed independently of their owners’ incomes.
72) A corporation ________ taxes on its profits and its stockholders ________ taxes on any
dividends made to them by the company.
A) pays; pay
B) pays; do not pay
C) does not pay; pay
D) does not pay; do not pay
73) Unlimited liability is NOT a characteristic of
A) corporations.
B) partnerships.
C) proprietorships.
D) the market economy today.
74) Where large amounts of capital are used, the dominant form of business organization is the
A) corporation.
B) partnership.
C) proprietorship.
D) partnership in manufacturing and the corporation in finance.
75) Greg and Todd form a partnership and start a business in which each has a 50 percent share
of the profit. After a year, the firm goes bankrupt and has debts of $20,000. Greg has no money,
but Todd has $25,000 in the bank. Todd must pay ________ of debt.
A) $0 because in a partnership each partner must pay the same
B) $0 because partners in a partnership have limited liability
C) half, or $10,000
D) $20,000
76) Martha and Wendy start a cookie shop and the business is organized as a corporation.
Because of poor planning the business goes bankrupt and the corporation’s debt is $30,000.
Martha has $30,000 in savings and Wendy has $80,000 in savings. Martha must pay ________
of the debt and Wendy must pay ________ of the debt.
A) $0; $0
B) $15,000; $15,000
C) $0; $30,000
D) None of the above answers is correct because each must pay but the amount each must pay
cannot be determined without more information about who managed the company.
77) Compared to corporations, businesses that are proprietorships
A) are far more numerous.
B) account for a larger percentage of the economy’s total revenue each year.
C) can raise capital more cheaply.
D) All of the above are correct answers.
78) The type of firm that is most numerous is the
A) proprietorship.
B) corporation.
C) partnership.
D) multinational.
79) The manufacturing sector is dominated by
A) corporations.
B) partnerships.
C) proprietorships.
D) government firms.
80) The vast majority of all business sales are accounted for by
A) partnerships.
B) proprietorships.
C) corporations.
D) nonprofit organizations.
81) ________ account for the largest portion of all firms; ________ account for most of the total
revenue received by businesses.
A) Proprietorships; partnerships
B) Proprietorships; corporations
C) Partnerships; corporations
D) Corporations; proprietorships
82) Which type of firm produces the largest share of manufacturing output?
A) proprietorships only
B) partnerships only
C) corporations only
D) Proprietorships and corporations are tied.
83) Which of the following firms has unlimited liability?
A) only proprietorships
B) only partnerships
C) only corporations
D) both proprietorships and partnerships
84) Suppose that Tracy and Pat start a business. Because of a series of bad decisions by Tracy,
the company goes bankrupt, owing a total of $50,000. Tracy is penniless and Pat is a millionaire.
If the company were organized as a partnership, Pat would be responsible for
A) over $1 million of debt.
B) $50,000 of debt.
C) $25,000 of debt.
D) $0 of debt.
85) What is the major advantage of the corporate form of business organization?
A) Its owners have limited liability.
B) Its owners have unlimited liability.
C) Its profits are not taxed.
D) Its profits are taxed twice.
86) A form of business whose profits are taxed twice is
A) a proprietorship.
B) a partnership.
C) a corporation.
D) either a proprietorship or a partnership, depending on other information.
4 Markets and the Competitive Environment
1) Which of the following are types of economic markets?
I. perfectly competitive
II. oligopoly
III. monopoly
IV. multilateral
A) I and II
B) II and III
C) I and IV
D) I, II and III
2) A market structure in which many firms are selling an identical product is called
A) perfect competition.
B) monopolistic competition.
C) oligopoly.
D) monopoly.
3) A market with the characteristics of many firms selling an identical product, many buyers, and
no restrictions on entry or exit to the market is
A) a monopoly market.
B) an oligopolistic market.
C) a perfectly competitive market.
D) a monopolistically competitive market.
4) The market for wheat is an example of
A) a monopoly market.
B) an oligopolistic market.
C) a perfectly competitive market.
D) a monopolistically competitive market.
5) Under ________ there are many firms selling identical products.
A) perfect competition
B) monopolistic competition
C) oligopoly
D) monopoly
6) Which of the following pairs of market types are both characterized by having a large number
of firms?
A) monopoly and oligopoly
B) monopoly and monopolistic competition
C) perfect competition and oligopoly
D) perfect competition and monopolistic competition
7) Under ________, there are many firms selling slightly different products.
A) perfect competition
B) monopolistic competition
C) oligopoly
D) monopoly
8) In a market where firms are successful in convincing their customers that their product is
different from their competitors’ product but otherwise have no barriers to entry would be best
characterized by
A) monopolistic competition.
B) a monopoly.
C) perfect competition.
D) an oligopoly market.
9) Which market type has characteristics as follows: large number of firms, differentiated
product?
A) perfect competition
B) monopolistic competition
C) oligopoly
D) monopoly
10) A market structure in which many firms compete by making similar but slightly different
products is called
A) perfect competition.
B) monopolistic competition.
C) oligopoly.
D) monopoly.
11) In a given market, a large number of firms sell a similar product. Consumers think that each
firm’s product is somewhat different from that of its competitors. This market is
A) perfectly competitive.
B) monopolistically competitive.
C) equivalent to a monopoly because consumers think the products are different.
D) equivalent to an oligopoly because consumers think the products are different.
12) The market structure in which a large number of firms compete by making similar but
slightly different products is called
A) monopoly.
B) monopolistic competition.
C) perfect competition.
D) oligopoly.
13) In monopolistic competition, there are ________.
A) many firms selling products for which no good substitutes exist
B) many firms selling similar but slightly different products
C) many firms, each selling an identical product
D) a small number of firms, each selling an identical product
14) A market structure in which a small number of firms compete is called
A) perfect competition.
B) monopolistic competition.
C) oligopoly.
D) monopoly.
15) Under oligopoly, there are ________ firms selling products that are ________.
A) many; either identical or different
B) a few; either identical or different
C) many; different
D) a few; identical
16) Coca Cola and Pepsi, which together account for about 85 percent of the soft drink market,
are best described as being in
A) a monopoly market.
B) an oligopolistic market.
C) a perfectly competitive market.
D) a monopolistically competitive market.
17) The air travel market, which is dominated by a few large firms, is an example of
A) a monopoly market.
B) an oligopolistic market.
C) a perfectly competitive market.
D) a monopolistically competitive market.
18) A market structure in which one firm produces a good or service that has no close substitutes
is called
A) perfect competition.
B) monopolistic competition.
C) oligopoly.
D) monopoly.
19) Which market type has characteristics as follows: one firm, good or service produced has no
close substitutes, barriers to entry prevent new firms from entering into the industry?
A) perfect competition
B) monopolistic competition
C) oligopoly
D) monopoly
20) Kansas Power and Light, the only supplier of electricity in Kansas, is an example of a firm in
what type of market?
A) a monopoly market
B) an oligopolistic market
C) a perfectly competitive market
D) a monopolistically competitive market
21) The CORRECT ranking of the four basic market structures from low (Herfindahl-
Hirschaman Index) HHI to high HHI is
A) perfect competition, oligopoly, monopolistic competition, monopoly.
B) monopoly, oligopoly, monopolistic competition, perfect competition.
C) perfect competition, monopolistic competition, oligopoly, monopoly.
D) monopoly, monopolistic competition, oligopoly, perfect competition.
22) Industry concentration measures the extent to which
A) products are differentiated by the firms in the industry.
B) the market is dominated by a small number of firms.
C) the industry executives concentrate on their product.
D) consumers are geographically concentrated.
23) A low concentration ratio suggests
A) a high degree of monopolization.
B) a high degree of competition.
C) that wages are a low share of costs.
D) that wages are a high share of costs.
24) For monopoly
A) the four-firm concentration ratio is 100.
B) the Herfindahl-Hirschman Index is 10,000.
C) there is only one firm in the industry.
D) All of the above answers are correct.
25) The four-firm concentration ratio equals the percentage of the value of ________ accounted
for by the four ________ firms in the industry.
A) sales; smallest
B) profits; smallest
C) sales; largest
D) profits; largest
26) Which of the following statements pertains to the four-firm concentration ratio?
I. It is the percentage of the value of sales accounted for by the four largest firms in an
industry.
II. A high concentration ratio is indicative of a high degree of competition.
III. The ratio is used to measure product differentiation.
A) I only
B) I, II only
C) I, III only
D) I, II, and III
27) The four-firm concentration ratio is the percentage of the ________ accounted for by
________ in an industry.
A) normal profit; any four firms
B) value of sales; the four largest firms
C) economic profit; any four firms
D) economic profit; the four largest firms
28) The four-firm concentration ratio measures
A) profitability.
B) economic efficiency.
C) technological efficiency.
D) competitiveness.
29) A high four-firm concentration ratio implies
A) an absence of product differentiation.
B) a presence of product differentiation.
C) an absence of competition.
D) a presence of competition.
30) If the four-firm concentration ratio is a very small number, then
A) there is a high degree of competition in the market.
B) there is no competition in the market.
C) the market must be dominated by a few firms.
D) the market is not perfectly competitive.
31) Suppose the four-firm concentration ratio for an industry is 10 percent. This value indicates
________. If the four-firm concentration ratio for another industry is 95 percent, this value
indicates ________.
A) the industry is competitive; the industry has very little competition
B) the industry has very little competition; the industry is very competitive
C) the industry has firms worldwide; the industry is concentrated in one country
D) the HHI will be high; the HHI will be low
32) If an industry is monopolized by one firm, the four-firm concentration ratio equals
A) 1 percent.
B) 25 percent.
C) 40 percent.
D) 100 percent.
33) If an industry has a four-firm concentration ratio equal to one hundred percent, then it is
definitely the case that the industry is
A) a monopoly.
B) perfectly competitive.
C) monopolistically competitive.
D) either a monopoly or an oligopoly.
34) If the four-firm concentration ratio for an industry equals 100 percent, then definitely
A) the Herfindahl-Hirschman Index (HHI) equals 10,000.
B) the industry is a monopoly.
C) a small number of firms are in the industry.
D) there are no barriers to entry into the industry.
35) If 10 firms share the sales of the market equally, the four-firm concentration ratio is
________ percent.
A) 100
B) 40
C) 10
D) 5