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Chapter 21 Rents, Profits, and the Financial Environment of Business 253
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)
b
ondholders 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)
b
onuses 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.
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) A person starts her own business. She quits her $40,000 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 $11,000. B) $45,000 and $5000.
C) $51,000 and $5000. D) $51,000 and $45,000.
137) A person 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 $5000. B) $70,000 and $70,000.
C) $70,000 and $5000. D) $5000 and $5000.
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)
J
oanne left her last job, in which she was earning $50,000, in order to form her own consulting
business. Her revenues for the first year of consulting were $200,000. 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)
J
oanne left her last job, in which she was earning $50,000, 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) $10,000. 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 $7 per
item. We can conclude that the firm s
A) accounting profit was $1,000, and its economic profit was $500.
B) accounting and economic profits were both $1000.
C) accounting profit was $500, and economic profit was $1,000.
D) accounting profit was $1000, and economic profit was $1,500.
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 10 percent and a business pays $100,000 for a lease on a factory, the explicit
costs are
A) $110,000. B) $10,000. C) $100,000. D) $90,000.
158) Suppose that the implicit cost for a business was $1,000 and the explicit cost was $5,000 and that
the firm sold 1,000 units of its products at $6 per item. We can conclude that the firm s
A) accounting profit was $6,000, and its economic profit was $0.
B) accounting and economic profits were both $0.
C) accounting profit was $1,000, and economic profit cannot be determined.
D) accounting profit was $1,000, 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
b
ased 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, $2,000 in Company X stocks, $1,000 in U.S. Savings
Bonds and have $500 in your checking account. If Company X goes bankrupt, the most you
could lose is
A) $13,500. B) $11,500. C) $2,000. 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?
