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 $8 per unit, the accounting profit received by the producer is
A) $1.2 million.
B) $850,000.
C) $1.6 million.
D) $400,000.
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 the same as 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 donut 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 donut 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 $40,000 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) $15,000.
B) -$11,500.
C) $11,500.
D) -$55,000.
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 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 coffee shop earns $25,000 in total revenues per month with explicit costs of
$15,000 and opportunity costs of $10,000. Your economic profit is
A) $16,000.
B) $12,000.
C) $5,000.
D) zero.
69) Suppose your donut shop earns $25,000 in total revenues per month with explicit costs of
$12,000 and opportunity costs of $8,000. Your accounting profit is
A) $45,000.
B) $13,000.
C) $33,000.
D) zero.
70) If your business earns $10,000 in revenues, has explicit costs of $8,000, and implicit costs of
$5,000, your economic profit is
A) $2,000.
B) -$3,000.
C) $5,000.
D) $3,000.
71) If your business earns $20,000 in revenues, has explicit costs of $7,000, and implicit costs of
$5,000, your accounting profit is
A) $32,000.
B) -$8,000.
C) $8,000.
D) $13,000.
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 $5,000 and the firm’s explicit costs are $3,000. From this we
know that this firm’s
A) accounting profit is $500.
B) economic profit is $2,000.
C) accounting profit is $12,000.
D) economic profit is $1,000.
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) be 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) Juanita 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.
99) All of the following are characteristics of a proprietorship EXCEPT
A) the business is owned by one individual.
B) one person is responsible for all the debts of the firm.
C) one person gets all of the profits.
D) the firm can form a corporation to protect itself against the debts.
100) Which of the following is NOT an advantage of a proprietorship?
A) They are easy to form and dissolve.
B) Decision-making resides with one person—the owner.
C) Liability of the owner is unlimited.
D) Profits are only taxed once.
101) Which of the following is NOT a disadvantage of a proprietorship?
A) how profits are taxed
B) ability to raise capital
C) unlimited liability
D) the disposition of the firm when the owner dies
102) Unlimited liability exists when
A) the profits of the firm are taxed once.
B) a firm dissolves when the owner dies.
C) a corporation exists.
D) the personal assets of the owner of a firm can be seized to pay off the firm’s debts.
103) The most likely source of investment funds for a proprietorship is
A) sales of stocks.
B) sales of bonds.
C) loans from banks.
D) the personal funds of the owner.
104) A business owned by two or more joint owners, or partners, who share the responsibilities
and the profits of the firm and are individually liable for all the debts is a(n)
A) corporation.
B) entrepreneur.
C) proprietorship.
D) partnership.
105) In a partnership, debts accumulated by one partner are
A) the responsibility of that partner only.
B) the responsibility of that partner plus any partners who are actively involved in running the
partnership.
C) the responsibility of all of the other partners for the full amount of the debt.
D) the responsibility of all of the other partners, up to the total value of the firm.
106) Which of the following is NOT an advantage of a partnership?
A) limited liability
B) easy to form
C) Profits are subject to only personal taxation.
D) permits more effective specialization in occupations
107) An advantage of a partnership over a proprietorship is
A) limited liability.
B) that profits are not taxed twice.
C) the ability to take advantage of greater specialization.
D) that it is easier to dissolve.
108) The owner(s) of a corporation
A) is the entrepreneur.
B) are the shareholders.
C) are the bondholders.
D) is the CEO.
109) Compared to a proprietorship, a disadvantage of a partnership is
A) that profits are taxed twice.
B) that it is harder to keep the firm going after the death of an owner.
C) unlimited liability.
D) that potential liability to each partner is greater.
110) Which of the following is NOT an advantage of a partnership?
A) the taxation of profits
B) the issue of liability
C) the legal paperwork needed to form a partnership
D) separation of partner’s duties
111) In a partnership
A) each partner’s liability is limited to their investment in the company.
B) profits are taxed at both the corporate rate and the personal income tax rate.
C) upon the death of a partner it may be necessary to sell the business.
D) there is a separation of ownership and management like in a corporation.
112) A difference between a proprietorship and a partnership is that
A) a proprietorship is easy to form while a partnership is hard to form.
B) a proprietorship has only one owner while a partnership has only two owners.
C) a partnership allows for specialization while a proprietorship does not.
D) the profits in a proprietorship are taxed only once while in a partnership they are taxed twice.
113) A legal entity that may conduct business in its own name just as an individual does is a(n)
A) corporation.
B) entrepreneur.
C) proprietorship.
D) partnership.
114) Corporations are responsible for approximately what percentage of total business revenues?
A) 19 percent
B) 50 percent
C) 72 percent
D) 83 percent
115) The characteristic of limited liability enables corporations to
A) avoid taxes on some of their profits.
B) exist even when owners die.
C) raise large amounts of financial capital.
D) start up and dissolve easily.
116) The concept of limited liability
A) does not apply to a corporation.
B) means that the owners of a corporation have liability limited to the value of the shares in the
firm.
C) means that owners of a firm are subject to double taxation.
D) limits the amount of specialization that can occur in a firm.
117) Limited liability exists when
A) the liability of owners is limited to the value of the shares in the firm they own.
B) the liability of owners is limited to the share of the debt they personally took on.
C) partners specialize and each partner is responsible for the debts of his or her specialized area.
D) bondholders must receive their payments before stockholders can earn any money.
118) Dividends are
A) the portion of a corporation’s profits that are distributed to stockholders.
B) the portion of a corporation’s revenues that are distributed to bondholders.
C) bonuses given to managers of corporations, to ensure that the managers perform in the way
that stockholders want.
D) taxes on the profits of corporations.
119) Which of the following statements about business organizations is TRUE?
A) Partnerships are more common than proprietorships and are responsible for a larger
percentage of business receipts.
B) Proprietorships are more common than either partnerships or corporations but are responsible
for the smallest share of total business receipts.
C) Corporations are larger in number than either proprietorships or partnerships and also receive
a larger percentage of total business receipts.
D) Partnerships are larger than both proprietorships and corporations but are less numerous than
corporations.
120) An important problem with corporations is
A) the inability of the government to control and tax the firms.
B) the possibility of large liabilities for the owners.
C) the separation of ownership and control.
D) the difficulties with raising financial capital.
121) If the death of an owner causes the firm to dissolve, the firm must have been
A) a partnership only.
B) a proprietorship only.
C) a corporation only.
D) either a proprietorship or a partnership.
122) It is likely that the owners have little to do with the day-to-day management of a firm in the
case of
A) partnerships only.
B) proprietorships only.
C) corporations only.
D) partnerships and corporations.
123) The problem with the separation of ownership from control is that
A) the owner in a proprietorship may not always act in the profit-maximizing fashion because he
or she may not have the experience or expertise that professional managers have.
B) the managing partner of a firm may not always behave in the way that other managers would
if they were the managing partners.
C) the managers of the firm can make decisions that reduce the wealth of the owners while not
reducing their own wealth.
D) the owners of firms may not always know the best way to run a firm, yet they are the ones
who elect the managers of the firm.
124) Accounting profits are found by total revenues minus
A) explicit costs.
B) explicit and implicit costs.
C) implicit costs.
D) all opportunity costs.
125) Normal rate of return is
A) accounting profit.
B) an explicit cost.
C) economic profit.
D) the amount that must be paid to obtain investment in a business.
126) The amount that must be paid to an individual to get them to invest in the industry is
A) a normal rate of return.
B) the explicit costs.
C) reinvestment.
D) financial capital.
127) The opportunity cost of capital is
A) an explicit cost.
B) a part of economic profits.
C) usually unknown and must be estimated by looking at the price of capital goods.
D) the normal rate of return.
128) Economic profits are found by total revenues minus
A) explicit costs.
B) explicit and implicit costs.
C) implicit costs.
D) all opportunity costs.