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Chapter 21 Rents, Profits, and the Financial Environment of Business 233
6) Accounting profit can be calculated as
A) total revenue explicit costs.
B) total revenue implicit costs.
C) total revenue explicit costs implicit costs.
D) total revenue fixed costs.
7) Which of the following participants in the working of a firm are referred to as residual claimants?
A) Workers B) Managers
C) Entrepreneurs D) All of the above
8) A proprietorship is
A) difficult to form.
B) taxed twice once when it pays business taxes and again when its owner pays personal
income taxes.
C) not often found in developed economies, in which corporations have become the most
common form of business organization.
D) risky for its owner, who is personally responsible for the firm s debts.
9) The most common type of firm in the United States is the
A) proprietorship. B) partnership.
C) corporation. D) limited partnership.
10) Which of the following options is NOT a characteristic of a proprietorship?
A) Single ownership B) Unlimited liability
C) Double taxation D) Easy to form and dissolve
11) A proprietorship is
A) two or more individuals in business together.
B) a corporation that is taxed like an individual.
C) a business owned by one individual who makes all of the decisions.
D) a government owned franchise.
12) The disadvantages of proprietorships include
A) limited liability for the owner.
B) double taxation of business profits.
C) the fact that the proprietorship can continue even after the owner dies.
D) the fact that the proprietor is solely responsible for all the firm s debts.
13) By definition, a proprietorship is
A) owned by many shareholders.
B) a large manufacturing concern.
C) owned by a single individual.
D) managed by a large group called the board of directors.
14) An advantage of proprietorships is
A) the ease with which they can be formed and dissolved.
B) their ability to raise large amounts of equity capital.
C) the fact that their profits are not taxed.
D) the breadth of management expertise that comes from having a board of directors.
15) One advantage of a proprietorship is that
A) it is relatively easy to raise financial capital for a proprietorship.
B) a proprietorship is relatively easy to form and to dissolve.
C) there are limits to the possible liabilities of the owner.
D) depreciation rates on capital are higher.
16) A proprietorship is
A) a business with annual sales of less than $50,000 a year.
B) a business owned by one individual that employs 10 or fewer workers, and has been in
business less than 15 years.
C) a business owned by one individual who receives the profits and is legally responsible for
the debts of the firm.
D) a form of business in which the stock of the company is closely held by members of one
family.
17) The most common form of business organization, as far as the number of such firms in business,
is the
A) proprietorship. B) partnership.
C) corporation. D) S corporation.
18) One disadvantage of a partnership is
A) limited liability. B) lower monitoring costs.
C) difficulty raising funds. D) it permits greater specialization.
19) In a partnership, legal responsibility for all debts is
A) shared by the partners. B) passed to the shareholders.
C) paid by the principle owner. D) handled by the bondholders.
20) One advantage of a partnership is
A) lower costs. B) they are easy to form.
C) all the profits go to the older partner. D) they are double taxed.
21) In a partnership, debts accumulated by one partner
A) are the responsibility of that partner only.
B) are the responsibility of the other partners as well.
C) are the responsibility of all the employees of the partnership, regardless of whether those
employees are partners.
D) are the responsibility of the other partners only up to the amount each partner initially
invested in the partnership.
22) Compared to a proprietorship, an advantage of a partnership is
A) that profits are not taxed twice.
B) double taxation.
C) the ability to take advantage of greater specialization.
D) the limited liability of the partners.
23) Comparing proprietorships with partnerships, which is true?
A) In both cases, profits are taxed only once.
B) Partnerships outnumber proprietorships 2 to 1 in the United States.
C) Proprietorships generally end with the death of the owner, but partnerships continue as
long as at least one partner survives.
D) A proprietor faces unlimited liability for her firm s debts, but in a partnership each partner
is only responsible for an even share of the firm s indebtedness.
24) Of the owners of the following firms, which does not have unlimited liability for the business
debts?
A) Roy Ray s Grocery Store, Roy Ray, proprietor
B) The partnership of Reese and Jones, Attorneys at Law
C) The Huber Corporation
D) Wren s Feed and Seed Store, a proprietorship
25) Corporations account for
A) the largest proportion of business revenues generated in the United States.
B) the largest amount of taxes paid to the U.S. government.
C) the largest number of firms in the United States.
D) the smallest amount of revenues in the United States.
26) Which of the following is NOT a characteristic of a corporation?
A) Limited liability for shareholders B) Double taxation
C) Separation of ownership problems D) Limited ability to raise capital funds
27) The main advantage of a corporate form of organization is that
A) shareholders have limited liability.
B) shareholders have unlimited liability.
C) shareholders are not subject to double taxation.
D) all corporate profits must be distributed as dividends.
28) In general, which form of business organization has the greatest capacity to raise large sums of
financial capital?
A) Sole proprietorships B) Partnerships
C) Limited partnerships D) Corporations
29) The form of business organization responsible for generating the greatest portion of business
revenues in the United States is the
A) corporation. B) dual proprietorship.
C) proprietorship. D) partnership.
30) The owners of a corporation are
A) the employees of the firm. B) the shareholders.
C) completely in control of the firm. D) taxed only once.
31) Corporations have a separation and control problem because
A) owners and managers frequently have different incentives.
B) most of the profits are reinvested.
C) the shareholders control the firm.
D) taxes are paid only by the board of directors.
32) The double taxation of corporate profit in the United States refers to the fact that
A) tax rates on partnerships are very high.
B) depreciation is not a deductible expense.
C) corporate profit is first taxed and then any dividends paid are subject to personal income
tax.
D) proprietorships are not subject to any tax on earnings.
33) An advantage of a corporation is
A) the ability to raise large sums of financial capital.
B) unlimited liability on the part of shareholders.
C) the fact that ownership and control are never separated.
D) the fact that the corporation is dissolved when one of its owners dies.
34) Limited liability is a characteristic of
A) partnerships only. B) corporations only.
C) partnerships and proprietorships only. D) proprietorships only.
35) Monitoring the performance of the people managing the firm is easiest in the case of
A) proprietorships. B) partnerships.
C) corporations. D) S corporations.
36) Owners may have little to do with the management of the firm in the case of
A) partnerships. B) corporations.
C) proprietorships. D) either corporations or proprietorships.
37) Accounting costs represent
A) explicit costs paid by the firm. B) opportunity costs.
C)
b
oth sunk and future costs. D) long run costs only.
38) Implicit costs are measured by
A) the value of the next
b
est alternative uses of inputs.
B) actual expenses paid by a firm.
C) total revenues minus total costs.
D) the lowest value of all alternative uses of inputs.
39) The implicit cost incurred by a firm to use its resources to produce its output is the firm s
A) total cost. B) explicit cost.
C) opportunity cost. D) accounting cost.
40) Which is the best example of a firm s implicit costs?
A) Wages
B) The opportunity cost of owner provided labor
C) Rent
D) Taxes
41) Explicit costs are
A) the opportunity costs of all resources used by the firm.
B) the costs associated with the resources that the firm owns.
C) actual expenditures that a firm must make.
D) all costs associated with the short run.
42) Implicit costs are
A) the costs of using factors that a producer hires or rents.
B) the opportunity costs of using factors that a producer does not buy or hire but already
owns.
C) costs that are taken into consideration by accountants.
D) costs that are variable in the short run and fixed in the long run.
43) Economists also refer to the normal rate of return on investment as
A) a residual cost. B) the opportunity cost of capital.
C) the equity kicker. D) the fixed cost of entrepreneurship.
44) Another term to describe the normal rate of return on capital is the
A) fixed cost of capital. B) depreciation cost of capital.
C) opportunity cost of capital. D) monopoly rent.
45) The normal rate of return is the
A) average rate of return earned in an industry at a given point in time.
B) opportunity cost of capital.
C) return on capital associated with zero accounting profits.
D) the amount paid to an investor when the firm is an on going concern.
46) The opportunity cost of capital is
A) the rate of return realized on an investment.
B) the rate of return that could be earned by the owner s capital were it used elsewhere.
C) the rate used to calculate a firm s tax liability.
D) the rate of interest the government uses to calculate legal business tax penalties.
47) Which of the following is NOT a correct description of opportunity cost of capital?
A) It is the normal rate of return on investment.
B) It is normally included in accounting costs.
C) It is the income sacrificed by not investing in another firm.
D) It is an implicit cost.
48) When an entrepreneur invests his own financial capital in order to start a business,
A) the opportunity cost of capital should be included in the economic cost of doing business.
B) the investment is treated as a fixed cost, so it should not be considered as a cost of doing
business.
C) the firm s economic profits will exceed its accounting profits.
D) the accounting costs increase because the funds would otherwise have to be borrowed.
49) Suppose the best investment you could make with $100,000 in cash is to purchase a government
bond that pays 14 percent interest per year. If you decide to invest the money in your own
business instead of buying the government bond, the opportunity cost of this financial capital is
A) $1,400 per year.
B) $100,000 per year.
C) $14,000 per year.
D) zero, because you already had the $100,000.
50) Single owner proprietorships often unintentionally exaggerate their profits because they
A) forget their explicit losses.
B) look at after tax instead of pre tax costs.
C) pay their bills late and therefore incur large interest charges.
D) neglect to consider the opportunity cost of the owner s labor.
51) Often single owner proprietorships seem more profitable than they really are. The reason for
this is that
A) they receive special tax benefits compared to corporations.
B) they use different accounting procedures.
C) they often fail to consider the opportunity cost of the labor provided by the owner.
D) they are not allowed to deduct depreciation expense.
52) If, as an entrepreneur, I am earning accounting profits of $50,000 per year and the opportunity
cost of my time is $60,000,
A) I am earning economic profits of $10,000.
B) I am earning economic profits of $50,000.
C) I should close my business.
D) I am in a long run equilibrium position.
53) If, as an entrepreneur, I am earning accounting profits of $60,000 per year and the opportunity
cost of my time is $50,000,
A) I am earning economic profits of $10,000.
B) I am earning economic profits of $60,000.
C) I am earning economic losses of $10,000.
D) I should close my business.
54) Economic profits equal
A) accounting profits.
B) accounting profits less economic rents.
C) total revenue less the opportunity costs of all factors of production.
D) accounting profits plus the owner s labor opportunity costs.
55) If the explicit costs to a firm to produce a unit of output are $6 and the firm sells 200,000 units of
output for $9 per unit, the accounting profit received by the producer is
A) $1.2 million. B) $850,000. C) $1.8 million. D) $600,000.
56) Which of the following statements is FALSE?
A) A correct measure of a firm s economic cost includes both accounting and opportunity
cost.
B) The accounting profit earned by a firm will always be less than its economic profit.
C) The major difference between accounting and economic profit is that accounting profit
does not reflect the opportunity cost of using resources.
D) The accounting profit of a firm is its total revenue minus total explicit costs.
57) 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
A) $24,000. B) less than $24,000.
C) more than $24,000. D) $80,000.
58) Suppose that you open your own business and earn an accounting profit of $30,000 per year.
When you started your business, you left a job that paid you a $25,000 salary annually. Also,
suppose that you invested $70,000 of your own funds to start up your business. If the normal
rate of return on capital is 5 percent, your economic profit is
A) $5,000. B) $1,500. C) $1,500. D) $5,000.
59) Suppose that you open your own business and earn an accounting profit of $35,000 per year.
When you started your business, you left a job that paid you a $30,000 salary annually. Also,
suppose that you invested $70,000 of your own funds to start up your business. If the normal
rate of return on capital is 10 percent, your economic profit is
A) $5,000. B) $5,000. C) $2,000. D) $2,000.
60) Economic profits are equal to
A) total revenues minus total fixed costs.
B) total revenues, after tax, minus cost of goods sold.
C) total revenues minus the implicit and explicit costs of all inputs used.
D) total revenues minus the opportunity cost of labor.
61) Accounting profits are total revenues minus
A) all relevant opportunity costs.
B) explicit and implicit costs.
C) explicit costs and all other relevant opportunity costs.
D) explicit costs.
62) Accounting profit is equal to
A) total revenue minus dividends and interest.
B) dividends paid.
C) total revenue minus implicit costs.
D) total revenue minus explicit costs.
63) In comparing accounting profit with economic profit, we generally find that
A) accounting profit is less than economic profit.
B) economic profit and accounting profit are the same in the short run.
C) accounting profit is greater than or equal to economic profit.
D) economic profit exceeds accounting profit by the amount of opportunity costs.
64) In considering economic profit in a market economy, it is correct to say that
A) there should never be any economic profit.
B) economic profit will only occur, even in the short run, as a result of imperfect competition.
C) economic profit performs an important function in allocating resources to their most
highly valued uses.
D) economic profit tends to reduce the production efficiency of the economy, leading to
wasted resources.
65) Economic profits are
A) the same as accounting profits when firms do not own capital equipment.
B) always greater than accounting profits.
C) equal to accounting profits plus the implicit costs of the firm.
D) whatever remains after all opportunity costs have been taken into account.
66) Accounting profit will always be
A) more than economic profit. B) equal to sunk costs.
C) less than economic profit. D) equal to implicit costs.
67) Economic profit is always
A) greater than accounting profit.
B) equal to accounting profit.
C) less than accounting profit.
D) equally likely to be either greater or less than accounting profit.
68) 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
A) $16,000. B) $12,000. C) $4,000. D) zero.
69) 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 accounting profit is
A) $16,000. B) $12,000. C) $4,000. D) zero.
70) If your business earns $10,000 in revenues, has explicit costs of $7,000, and implicit costs of
$5,000, your economic profit is
A) $2,000. B) $2,000. C) $5,000. D) $3,000.
71) If your business earns $10,000 in revenues, has explicit costs of $7,000, and implicit costs of
$5,000, your accounting profit is
A) $2,000. B) $2,000. C) $5,000. D) $3,000.
72) The economy s current rate of interest is 10 percent and a firm has $10,000 of owner invested
capital. Its total revenue is $5000 and the firm s explicit costs are $3500. From this we know that
this firm s
A) accounting profit is $500. B) economic profit is $1,500.
C) accounting profit is $1,500. D) economic profit is $5,000.
73) The economy s current rate of interest is 10 percent and a firm has $10,000 of owner invested
capital. Its total revenue is $5000 and the firm s explicit costs are $3500. From this we know that
this firm s
A) accounting profit is $500. B) economic profit is $1,500.
C) accounting profit is $11,500. D) economic profit is $500.
74) To find economic profit from accounting profit, it is necessary to
A) subtract dividends. B) add retained earnings.
C) subtract the opportunity cost of capital. D) add depreciation expense.
75) On a bar graph comparing a firm s economic profit with its accounting profit, it will always be
true that
A) explicit costs will be greater in the column representing accounting profit.
B) explicit costs will be greater in the column representing economic profit.
C) total revenue will be greater in the column depicting accounting profit.
D) opportunity costs will be missing from the column depicting accounting profit.
76) The goal of the firm is
A) low labor turnover. B) to maximize sales.
C) to minimize costs. D) profit maximization.
77) A basic tenet of the theory of the firm is that the firm s primary objective is to
A) stay out of debt.
B) produce a given level of output at a specified cost.
C) maximize economic profits.
D) operate for the benefit of society.
78) Economists assume that the goal of a firm is to
A) maximize economic profits. B) sell as many units as possible.
C) maximize gross revenues. D)
b
e the largest firm in its industry.
79) The most commonly accepted objective for a firm is
A) to stay in business at all cost. B) to maximize total revenue.
C) to maximize economic profit. D) to minimize the variable cost outlay.
80) The higher are a firm s risk corrected returns,
A) the lower are its labor costs.
B) the higher are its opportunity costs.
C) the more advantage it has in obtaining investor financing.
D) the more difficulty it will have financing its expansion plans.
81) A business organization that employs resources to produce goods and services for profit is
A) economic rent. B) a firm.
C) inside information. D) the opportunity cost of capital.
82) An entrepreneur is
A) the rate of return on capital.
B) a legal form of business.
C) one who takes risks and makes innovations in organizing a firm.
D) the rate of discount.
83) Which of the following is not a legal organization of a firm?
A) Corporation B) Partnership
C) Entrepreneurship D) Proprietorship
84) The most numerous or plentiful firms in the United States are found in this form of business
A) partnership. B) proprietorship.
C) monopoly. D) corporation.
85) A proprietorship is a business
A) with annual sales below $100,000.
B) in which the stock of the company is closely held by members of one family.
C) which produces a service rather than goods.
D) owned by one individual who is responsible legally for the debts of the firm.
86) By definition, a firm is
A) a business organization that makes profits.
B) a business organization that utilizes resources to produce goods or services with the goal
of making a profit.
C) a business organization that consists of more than one person.
D) an organization, whether private or public, that may or may not make a profit.
87) In a firm, an entrepreneur is one who
A) decides to hire or fire.
B) works for the owner by running the firm.
C) takes the risks associated with a business firm.
D) represents the firm in legal proceedings.
88) If the entrepreneur is also the manager of the firm, we would expect
A) the manager to work hard because he or she is also the residual claimant.
B) the manager to not work hard since there is no possibility of further advancement.
C) the firm to operate poorly because the specialization of labor is not adequate.
D) the firm to operate poorly because the entrepreneur is not as good at managing workers as
a professional manager would be.
89) Out of pocket expenses such as wages and raw materials are
A) direct costs. B) an owner provided capital cost.
C) implicit costs. D) explicit costs.
90) Expenses that a firm does not have to pay out of pocket are
A) wages of employees. B) taxes.
C) implicit costs. D) explicit costs.
91) Which of the following is not an implicit cost?
A) Wages
B) Opportunity cost of using an owner s savings
C) Owner provided capital
D) Owner provided labor
92) Which of the following is not an explicit cost?
A) Taxes
B) Rent
C) Wages
D) Opportunity cost of using an owner s savings.
93)
J
uanita has just started a business and is using her personal car to deliver goods. The use of her
car is an example of
A) an explicit cost to the business. B) an implicit cost to the business.
C) financial capital. D) interest.
94) A legal organization of a firm where the business is owned by one individual who makes the
business decisions, receives all the profits, and is legally responsible for the debts of the firm is
a(n)
A) corporation. B) entrepreneur.
C) proprietorship. D) partnership.
95) The difference between explicit costs and implicit costs
A) is that explicit costs are opportunity costs while implicit costs are not.
B) is that implicit costs are opportunity costs while explicit costs are not.
C) is that explicit costs are short run costs and implicit costs are long run costs.
D) is that explicit costs involve resources that are purchased and implicit costs involve
resources the firm already owns.
96) Mary and Jane are partners in a business. Their business is growing but has not yet reached the
point where they can afford a new delivery truck. Jane owns an old truck that she has not been
using. She decides to donate it to their business for free.
A) This transaction (donation) involves no economic cost.
B) This transaction involves both economic cost and accounting cost.
C) This transaction involves economic cost but no accounting cost.
D) This transaction involves no economic cost and no accounting cost.
97) An accountant shows an invoice for a resource to the manager of the firm. They are discussing
A) explicit costs.
B) implicit costs.
C) economic profits.
D) either explicit costs or implicit costs, but we can t tell without more information.
98) Proprietorships are
A) the most common form of business organization in the country.
B) responsible for most of the profits in the country.
C) generally large relative to other business organizations.
D) easy to form but difficult to dissolve.
