59) When a resource has a perfectly elastic supply curve
A) the amount of economic rent for the resource is determined by its supply.
B) the amount of economic rent for this resource is determined by demand for the resource.
C) there is no economic rent being earned by this resource.
D) the entire payment received by this resource is economic rent.
60) The supply curve for land in the city of San Francisco is most likely
A) horizontal or perfectly elastic.
B) a downward sloping straight line.
C) an upward sloping straight line.
D) vertical or perfectly inelastic.
61) If the supply curve for land was a vertical line, then any payment made for land would be
considered
A) as economic rent.
B) as economic lease.
C) as economic interest.
D) as an opportunity lease payment.
62) The British economist most often associated with the issue of economic rent for land was
A) John Maynard Keynes.
B) Jeremy Bentham.
C) A. W. Phillips.
D) David Ricardo.
63) Which of the following would be most likely to receive high economic rent payments?
A) farmer
B) professional baseball player
C) factory worker
D) school teacher
64) A famous opera star made $2 million per year. He said he would rather sell insurance if he
couldn’t make more than $100,000 per year. If he is telling the truth, what’s his opportunity cost
as an opera star?
A) $2.0 million
B) $100,000
C) $1.9 million
D) $2.1 million
65) A famous opera star made $2 million per year. He said he would rather sell insurance if he
couldn’t make more than $200,000 per year. If he is telling the truth, how much is he being paid
in economic rent?
A) $2.0 million
B) $200,000
C) $1.8 million
D) $2.2 million
66) The term “economic rent” refers to payments
A) to owners of real estate.
B) for the use of any resource above its opportunity cost.
C) equal to the opportunity cost of the use of land.
D) for the use of housing in company owned properties.
67) David Ricardo used the example of land to demonstrate the concept of rent, as the supply of
land is
A) perfectly elastic.
B) relatively elastic.
C) perfectly inelastic.
D) negatively sloped.
68) A payment for the use of an input that exceeds the opportunity cost of the input is known as
A) real interest.
B) economic profit.
C) economic rent.
D) economic cost.
69) In the market for land, if the supply of land is perfectly inelastic, an increase in the demand
for land will result in a(n)
A) increase in the real interest rate.
B) increase in economic rent.
C) decrease in the equilibrium price.
D) increase in the quantity supplied of land.
70) If a major league baseball player would be willing to work for $700,000 per year and is
currently being paid $1,200,000 per year, that player is earning an annual economic rent of
A) $700,000.
B) $1,900,000.
C) $1,200,000.
D) $500,000.
71) If a major league baseball player would be willing to work for $500,000 per year and is
currently being paid $1,200,000 per year, the opportunity cost of his decision to play baseball is
A) $500,000.
B) $1,200,000.
C) $1,700,000.
D) $700,000.
72) Suppose that Oprah Winfrey was not a superstar, then she would have been a judge making
$100,000 per year. If she makes $65 million dollars this year, her economic rent is
A) $65.0 million.
B) $65.1 million.
C) $100,000.
D) $64.9 million.
73) 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
A) $63.0 million.
B) $63.1 million.
C) $100,000.
D) $62.9 million.
74) Suppose the supply of ocean front property in San Diego is perfectly inelastic. Any increases
in demand for this property increases the
A) economic rent.
B) opportunity cost of land owners.
C) present discounted value.
D) real interest rate.
75) Suppose Jon Stewart of the “Daily Show” makes an annual income of $2,000,000. If he quit
his television job and went into producing he could make $400,000 per year. Jon Stewart’s
annual economic rent to labor is
A) $1,400,000.
B) $2,000,000.
C) $400,000.
D) $1,600,000.
76) 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
A) $1,400,000.
B) 1,000,000.
C) $400,000.
D) $600,000.
77) Consider an NBA superstar Kobe Bryant and one of your economics professors. Who is
likely to receive more economic rent in his/her job? Explain your answer.
78) “Economic rent reflects a waste of resources.” Do you agree or disagree? Explain.
21.2 Firms and Profits
1) The fundamental goal of a firm or a business is to
A) produce the largest number of output units possible.
B) employ labor in the most socially responsible manner possible.
C) organize the factors of production and take risks.
D) earn the highest possible returns.
2) A business which is owned by two or more people is called a
A) proprietorship.
B) partnership.
C) corporation.
D) none of the above.
3) Which of the following is a disadvantage of the corporate form of business organization?
A) limited liability
B) limited financing
C) double taxation
D) unlimited liability
4) Which of the following is the most common form of business organization in the United
States?
A) proprietorship
B) partnership
C) corporation
D) S-corporation
5) Economic 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.
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 Microsoft 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) both sunk and future costs.
D) long run costs only.
38) Implicit costs are measured by
A) the value of the next-best 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) The normal rate of return on capital is also known as 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 $200,000 in cash is to purchase a
government bond that pays 10 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) $2,000 per year.
B) $200,000 per year.
C) $20,000 per year.
D) zero, because you already had the $200,000.
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 $75,000 per year and the
opportunity cost of my time is $60,000
A) I am earning economic profits of $15,000.
B) I am earning economic profits of $75,000.
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 $70,000 per year and the
opportunity cost of my time is $50,000
A) I am earning economic profits of $20,000.
B) I am earning economic profits of $70,000.
C) I am earning economic losses of $20,000.
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.