129) When economic profits are positive, accounting profits
A) must be positive.
B) will be negative.
C) will equal zero.
D) could be positive, negative or zero.
130) When accounting profits are positive, economic profits
A) must be positive.
B) will be negative.
C) will equal zero.
D) could be positive, negative or zero.
131) When economic profits are negative, accounting profits
A) must be positive.
B) will be negative.
C) will equal zero.
D) could be positive, negative or zero.
132) When accounting profits are negative, economic profits
A) must be positive.
B) will be negative.
C) will equal zero.
D) could be positive, negative or zero.
133) When economic profits are zero, accounting profits
A) must be positive.
B) will be negative.
C) will equal zero.
D) could be positive, negative or zero.
134) What is the relationship between accounting and economic profits?
A) Accounting profits are always larger than economic profits.
B) Economic profits are always larger than accounting profits.
C) There is no relationship between economic and accounting profits.
D) Economic profits are always negative.
135) Any business wanting to attract financial capital must expect to
A) earn a positive economic profit.
B) keep implicit costs as close to zero as possible.
C) pay a normal rate of return.
D) pay a below normal rate of return in order to make a positive rate of return itself.
136) Hillary starts her own business. She quits her $50,000 a year job, rents an office for $15,000
a year, pays wages and salaries of $50,000 a year, utilities of $4,000 a year, and materials of
$20,000. She uses her own car for sales work rather than leasing an equivalent car for $6000 a
year. If revenues are $140,000, her accounting profit and economic profit are respectively
A) $45,000 and $1,000.
B) $51,000 and $5,000.
C) $51,000 and -$5,000.
D) $45,000 and $51,000.
137) Mike starts his own business after quitting his job in which he made $75,000. Expenses
include $100,000 for wages and salaries, which includes a wage for the owner of $75,000,
utilities of $5000, equipment of $50,000, and materials of $40,000. If revenues are $200,000, his
accounting and economic profits are respectively
A) $80,000 and $5,000.
B) -$70,000 and -$70,000.
C) -$70,000 and $5,000.
D) $5,000 and $5,000.
138) A firm is making zero economic profits. From this, we know that
A) the firm is going to go out of business.
B) implicit costs are zero.
C) the firm is going to stay in business, but will not be able to attract new financial capital.
D) the firm will stay in business since it is covering all relevant opportunity costs.
139) The goal of the firm, according to economists, is to
A) stay in business for as long as possible.
B) sell as many units of the good it produces as possible.
C) grow as large as possible.
D) make as much economic profit as is possible.
140) A firm that is NOT maximizing profits
A) would never be able to operate in the United States.
B) must not be owned by stockholders.
C) may find it difficult to raise financial capital from external capital markets.
D) is likely to face legal prosecution from the Department of Commerce.
141) A disadvantage of corporations over a proprietorship or partnership is in the
A) legal liability.
B) ability to raise funds.
C) taxation system.
D) future of the firm when an owner dies.
142) An organization that brings together the factors of production is called
A) an industry.
B) a conglomerate.
C) a plant.
D) a firm.
143) Which of the following statements regarding accounting and economic profits is FALSE?
A) Economic profits can be zero even if accounting profits are positive.
B) Economic profits = total revenue – (explicit + implicit costs)
C) Accounting profits can be negative if economic profits are positive.
D) Accounting profits = total revenue – explicit costs
144) Another term for the opportunity cost of capital is
A) the normal interest rate.
B) the normal rate of return.
C) a normal profit.
D) a normal wage rate.
145) Which of the following is the formula used for computing economic profits?
A) economic profits = total revenue – implicit costs
B) economic profits = total revenue – (implicit costs + explicit costs)
C) economic profits = total costs – total revenue
D) economic profits = total revenue – explicit costs
146) In economics we assume that the goal of a firm is to
A) minimize costs.
B) maximize revenue.
C) maximize economic profits.
D) maximize total sales.
147) In analyzing the operation of a firm, an economist assumes the firm wants to
A) maximize total sales.
B) maximize total revenue.
C) maximize total production.
D) maximize total profits.
148) Joanne left her last job, in which she was earning $60,000, 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 economic profit that first year was
A) $0.
B) $50,000.
C) $200,000.
D) $75,000.
149) Joanne left her last job, in which she was earning $60,000, 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
A) $0.
B) $60,000.
C) $210,000.
D) $50,000.
150) Accounting profits are typically
A) greater than economic profits because accounting profits do not include explicit costs.
B) greater than economic profits because accounting profits do not include implicit costs.
C) smaller than economic profits because accounting profits do not include explicit costs.
D) equal to economic profits in the long run.
151) Which of the following equations is CORRECT?
A) accounting profit = total revenue – (explicit costs + implicit costs)
B) normal profit = accounting profit + economic profit
C) economic profit = accounting profit – implicit costs
D) economic profit = accounting profit – explicit costs
152) Suppose that during a given time period the implicit cost for a business was $1,000 and that
the explicit cost was $5,000. Also suppose that the firm sold 1,000 units of its products at $5 per
item. We can conclude that the firm’s
A) accounting profit was $5,000, and its economic profit was $0.
B) accounting and economic profits were both $0.
C) accounting profit was $0, and economic profit was $1,000.
D) accounting profit was $0, and economic profit was -$1,000.
153) 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 $8 per
item. We can conclude that the firm’s
A) accounting profit was $2,000, and its economic profit was $500.
B) accounting and economic profits were both $2,000.
C) accounting profit was -$500, and economic profit was $2,000.
D) accounting profit was $2,000, and economic profit was -$500.
154) Which of the following is the formula used for computing an accounting profit?
A) accounting profits = total revenue – implicit costs
B) accounting profits = total revenue – (implicit + explicit costs)
C) accounting profits = total costs – total revenue
D) accounting profits = total revenue – explicit costs
155) When a business has implicit costs
A) economic profits are greater than accounting profits.
B) economic and accounting profits are the same.
C) economic profits are less than accounting profits.
D) economic costs are the same as accounting costs.
156) An example of an implicit cost is
A) payment of a salary to a CEO of a company.
B) a business using a building owned by the business owner.
C) a payment to a resource owner.
D) the payment of interest on a bond.
157) If the interest rate is 1 percent and a business pays $100,000 for a lease on a factory, the
explicit costs are
A) $110,000.
B) $100,000.
C) $10,000.
D) $90,000.
158) Suppose that the implicit cost for a business was $2,000 and the explicit cost was $5,000
and that the firm sold 1,000 units of its products at $7 per item. We can conclude that the firm’s
A) accounting profit was $7,000, and its economic profit was $0.
B) accounting and economic profits were both $0.
C) accounting profit was $2,000, and economic profit cannot be determined.
D) accounting profit was $2,000, and economic profit was $0.
159) Accounting profits are
A) total revenue minus explicit costs.
B) total revenue minus implicit costs.
C) total revenue minus explicit and implicit costs.
D) total revenue minus normal costs.
160) Owner-provided capital and owner-provided labor are examples of
A) explicit costs.
B) implicit costs.
C) normal rate of return.
D) accounting costs.
161) Economic profits are
A) total revenue minus explicit costs.
B) total revenue minus implicit costs.
C) total revenue minus explicit and implicit costs.
D) total revenue minus accounting costs.
162) Economic profit is
A) total revenue × (explicit costs – implicit costs).
B) total revenue – (explicit costs – implicit costs).
C) total revenue + (explicit costs + implicit costs).
D) total revenue – (explicit costs + implicit costs).
163) The three basic legal forms of business enterprise in the United States are
A) monopolies, enterprises, and competitors.
B) vertical, horizontal, and conglomerate corporations.
C) national, global, and multinational corporations.
D) proprietorships, partnerships, and corporations.
164) Which of the following is the most common form of a business organization?
A) corporation
B) partnership
C) sole proprietorship
D) subchapter S corporation
165) The most common form of business organization in the United States is the
A) proprietorship.
B) partnership.
C) corporation.
D) cooperative.
166) Which of the following is considered an advantage of a sole proprietorship?
A) easy to raise large sums of capital
B) limited liability for owner
C) profit taxed only once
D) permits effective specialization
167) An advantage of the proprietorship as a form of business organization is
A) its limited liability.
B) its limited access to capital, thus reducing the possible size of debt.
C) that it is easy to form.
D) that it can sell bonds to the public.
168) A disadvantage of the proprietorship form of business organization is
A) its limited access to capital.
B) its limited liability.
C) that it can issue only one class of stock.
D) that the owner must fight a lot of red tape to form the firm.
169) Numerically, the dominant type of business enterprise in the United States is
A) the corporation.
B) the partnership.
C) the proprietorship.
D) the multinational corporation.
170) All of the following are advantages of organizing a business as a sole proprietorship
EXCEPT
A) ease of formation.
B) limited liability.
C) ease of decision-making.
D) single taxation.
171) When a business is owned and operated by a single individual who receives all of the
profits and is responsible for all debts, it is known as a
A) partnership.
B) conglomerate.
C) corporation.
D) proprietorship.
172) Tim has a toenail clipping business that is a sole proprietorship. If he is sued for a botched
pedicure
A) he has limited liability.
B) he has separation of ownership and control.
C) all of his personal assets are at risk.
D) he will be taxed doubly.
173) Unlimited liability is found in
A) proprietorships and corporations.
B) partnerships and corporations.
C) proprietorships and partnerships.
D) proprietorships, partnerships, and corporations.
174) In a partnership of two people
A) each person has 50 percent liability.
B) it is more difficult to specialize with two persons than with one.
C) each person has unlimited liability.
D) the law releases each partner from legal liabilities.
175) Owners face unlimited liability in
A) national corporations and global corporations.
B) partnerships and corporations.
C) proprietorships and corporations.
D) proprietorships and partnerships.
176) An advantage of the partnership form of business organization is
A) its limited liability.
B) its limited access to capital, thus reducing the possible size of debt.
C) the ability of its owners to specialize.
D) that it is difficult to start up, because a lot of thought has to go into the establishment of the
firm.
177) A disadvantage of the partnership form of business organization is
A) its limited access to capital.
B) its limited liability.
C) that it can issue only one class of stock.
D) that the owners must fight a lot of red tape to form the firm.
178) You have received your advanced degree in biochemistry with a specialty in recombinant
DNA technology. Your colleagues wish to form a partnership to research adenovirus vectors.
Your legal counsel advises you on the following aspects of a partnership, yet you tell her, based
on your knowledge of economics, that you think one of the following points is INCORRECT.
A) An advantage of the partnership would be that it is relatively easy to form, almost as easy as
forming a proprietorship.
B) The income of the partnership is treated as personal income and is subject only to personal
taxation rates.
C) The personal assets of each partner should be safe and would not necessarily be at risk due to
claims by financial institutions.
D) Partnerships often help reduce the costs of monitoring job performance in situations in which
it is difficult to measure objectively.
179) The majority of business revenues earned in the United States are earned by
A) proprietorships.
B) corporations.
C) partnerships.
D) cooperatives.
180) Which statement is FALSE considering both advantages and disadvantages of corporations
as a legal business organization?
A) Perhaps the greatest advantage of corporations is that their owners (the shareholders) enjoy
limited liability—limited to the value of their shares.
B) Legally the corporation continues to exist even if one or more owners cease to be owners.
C) Corporations usually are not as well positioned as proprietorships and partnerships to raise
large sums of financial capital.
D) Separation of ownership and control is a disadvantage of the corporate structure; owners and
managers may have different incentives.
181) Which form of business organization accounts for the largest proportion of sales in the
United States?
A) the corporation
B) the partnership
C) the proprietorship
D) the subchapter S partner-based proprietorship.
182) Most businesses in the United States are ________, and the type of business organization
that accounts for the LEAST amount of total revenues is ________.
A) proprietorships; partnerships
B) corporations; proprietorships
C) proprietorships; proprietorships
D) corporations; partnerships
183) An advantage of the corporate form of business organization is
A) unlimited liability.
B) easier access to capital.
C) that profits are taxed only on one level.
D) government supervision of its activities.
184) A disadvantage of the corporate form of business organization is
A) double taxation.
B) limited access to capital.
C) that the corporation can only do business in the state where it was incorporated.
D) unlimited liability for shareholders.
185) You own $10,000 in personal property, $3,000 in Corporation A stocks, $1,000 in U.S.
Savings Bonds and have $500 in your checking account. If Corporation A goes bankrupt, the
most you could lose is
A) $13,500.
B) $11,500.
C) $3,000.
D) $500.
186) When a business is considered by law to be a legal entity, it is known as a
A) partnership.
B) conglomerate.
C) corporation.
D) proprietorship.
187) All of the following are advantages of a corporation EXCEPT
A) double taxation.
B) limited liability.
C) ability to raise large sums of financial capital.
D) unlimited life.
188) The greatest advantage of a corporation is
A) ease of setting up the business.
B) the double taxation of dividends.
C) separation of ownership and control of the business.
D) limited liability.
189) 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
A) -$5,550.
B) -$5,000.
C) $20,000.
D) $25,000.
190) A normal rate of return on investment is equal to
A) accounting profit minus economic profit.
B) the opportunity cost of capital plus any other implicit costs.
C) accounting profit plus economic profit.
D) total revenue plus total accounting profit
191) What is a normal rate of return?
192) Discuss the advantages and disadvantages of proprietorships.
193) Why are there so many more proprietorships than corporations, yet corporations account for
so much more of the sales of business firms in the country?
194) What is the difference between accounting profits and economic profits? Which of the two
concepts is more appropriate for explaining decisions made by entrepreneurs? Explain.
195) Why is limited liability so important when firms try to raise large amounts of financial
capital? How is this advantage of a corporation tied to a disadvantage of a corporation?
196) For which type of organization is unlimited liability likely to be the greater problem-
proprietorships or partnerships? Why?
197) Amber has opened a coffee shop for many years on a piece of land that she has also owned.
She has also made accounting profits from the coffee shop. This year, rents in the area rose
considerably, and Amber responded by deciding to sell the land and the coffee shop to an
apartment builder. How can you explain Amber’s decision to sell her business?
198) “Economic profits are less than or at most equal to accounting profits.” Do you agree or
disagree? Explain.
21.3 Interest
1) Interest is paid to
A) all holders of stock.
B) individuals who own gold.
C) owners of capital.
D) borrowers of funds.
2) Which of the following is correct?
A) real interest rate = nominal interest rate – anticipated inflation rate
B) real interest rate = nominal interest rate + anticipated inflation rate
C) real interest rate = nominal interest rate * anticipated inflation rate
D) real interest rate = nominal interest rate / anticipated inflation rate
3) Interest can be defined as
A) the amount of funds loaned to a creditor.
B) the participation of a shareholder in the operations of a firm.
C) the return paid to owners of capital.
D) the return above opportunity cost paid to owners of a firm.
4) In economic terms, interest is the payment for
A) current command over resources.
B) producers’ goods.
C) stocks.
D) both consumer and capital goods.
5) Which of the following characteristics is NOT likely to increase the interest on a loan?
A) a high-risk proposal
B) a non-creditworthy borrower
C) a short-term loan
D) a larger dollar loan
6) In most cases, the higher is the quality of the collateral for a loan is
A) the higher is the interest rate.
B) the lower is the interest rate.
C) the riskier is the loan.
D) the greater is the handling charge for the loan.