Macroeconomics 2017 (Hubbard)
Chapter 6 Firms, the Stock Market, and Corporate Governance
6.1 Types of Firms
1) Which of the following must a firm in a market economy do today to succeed?
A) produce new or better goods or services
B) efficiently organize production
C) produce existing goods and services at a lower cost
D) Market firms today must do all of these things.
2) The typical firm in many industries has become ________ over the past 100 years, and efficiently
organizing production has become ________.
A) larger; more difficult
B) smaller; more difficult
C) larger; easier
D) smaller; easier
3) Public companies ________ and private companies ________.
A) sell stock in financial markets; also sell stock in financial markets
B) sell stock in financial markets; do not sell stock in financial markets
C) do not sell stock in financial markets; also do not sell stock in financial markets
D) do not sell stock in financial markets; sell stock in financial markets
4) Damian wants to start a business where he is the only owner and the company does not issue stock.
The type of business Damian wants to start is a
A) sole proprietorship.
B) partnership.
C) corporation.
D) Any of the above could be correct.
5) Juliana, Gabrielle, and Marcela want to start a business they are the only owners and the company
does not issue stock. The type of business they want to start is a
A) sole proprietorship.
B) partnership.
C) corporation.
D) Any of the above could be correct.
6) Arturo wants to start a business where he is the chief executive officer and the company does issue
stock. The type of business Arturo wants to start is a
A) sole proprietorship.
B) partnership.
C) corporation.
D) Any of the above could be correct.
7) A sole proprietorship is the type of business that has ________ government rules and regulations
affecting it.
A) no
B) the fewest
C) the most
D) only federal
8) As a form of business, a sole proprietorship
A) has limited liability.
B) has more than one owner.
C) cannot issue stock.
D) has the most government rules and regulations affecting it.
9) How do a partnership and a corporation differ?
A) Partnerships have unlimited liability while corporations have limited liability.
B) Corporations can issue stocks and bonds, while partnerships cannot.
C) Corporations face more taxes than do partnerships.
D) All of these are differences between the two types of businesses.
10) Assume you and your best friend set up a partnership and your lawyer tells you that as the owners,
you could each stand to lose your personal wealth if the business goes bankrupt. This means a
partnership
A) faces limited liability.
B) faces unlimited liability.
C) has little chance of succeeding.
D) is not a good type of business to set up.
11) The owner or owners control the day-to-day activities of which of the following types of business?
A) corporations and partnerships
B) partnerships and sole proprietorships
C) sole proprietorships and corporations
D) only corporations
12) A ________ is owned by its stockholders.
A) sole proprietorship
B) corporation
C) partnership
D) All of the above are correct.
13) In a partnership, the owners of the business and the business are ________, and in a sole
proprietorship, the owner of the business and the business are ________.
A) separate legal entities; also separate legal entities
B) not separate legal entities; also not separate legal entities
C) not separate legal entities; separate legal entities
D) separate legal entities; not separate legal entities
14) ________ of people work at firms that have 50 or more employees.
A) Less than 25 percent
B) About 50 percent
C) More than 75 percent
D) Close to 97 percent
15) In a typical year, new small firms create ________ jobs.
A) 250,000
B) 1.1 million
C) 1.8 million
D) 3.3 million
16) A sole proprietorship is limited to how many owners?
A) 1
B) 2
C) 10
D) There is no limit to the number of owners.
17) A partnership is limited to how many owners?
A) 2
B) 5
C) less than 10
D) There is no limit to the number of owners.
18) A corporation is limited to how many owners?
A) 1
B) 2
C) less than 10
D) There is no limit to the number of owners.
19) What does unlimited liability mean?
A) The owners of the business are personally responsible for paying expenses incurred by the business.
B) Only employees can have a claim on the assets of the business.
C) The personal assets of the owners cannot be claimed if the business is bankrupt.
D) Anybody with a liability against a firm can claim up to three times their liability.
20) Which of the following is an advantage of starting a new business as a partnership?
A) The owners have limited personal liability.
B) A partnership has few government rules and regulations to comply with.
C) Business profits are not taxed.
D) A partnership can easily attain additional funding.
21) Torrie is thinking of starting up a small business selling hand-painted wine glasses. She is
considering setting up her business as a sole proprietorship. What is one advantage to Torrie of setting
up her business as a sole proprietorship?
A) As a sole proprietor, Torrie would face limited liability.
B) As a sole proprietor, Torrie would have the ability to share risk with shareholders.
C) As a sole proprietor, Torrie would have both ownership and control over the business.
D) All of the above would be advantages of setting up her business as a sole proprietorship.
22) Torrie is thinking of starting up a small business selling hand-painted wine glasses. She is
considering setting up her business as a sole proprietorship. What is one disadvantage to Torrie of
setting up her business as a sole proprietorship?
A) As a sole proprietor, Torrie would be taxed twice.
B) As a sole proprietor, Torrie would not have control of the business.
C) As a sole proprietor, Torrie would face unlimited liability.
D) As a sole proprietor, Torrie would be subject to significant rules and regulations.
23) Which of the following is not an advantage of starting a new business as a sole proprietorship?
A) separation of ownership and business liability
B) limited control over the operation of the business
C) the initial cost in setting up the business
D) possibility of double taxation
24) In the United States, ________ percent of all firms are sole proprietorships.
A) 4
B) 14
C) 72
D) 82
25) In the United States, ________ percent of all firms are partnerships.
A) 4
B) 10
C) 14
D) 26
26) In the United States, ________ percent of all firms are corporations.
A) 18
B) 60
C) 72
D) 82
27) From the highest percentage to the lowest percentage, the number of firms by business type in the
United States is represented by which of the following?
A) sole proprietorships, corporations, partnerships
B) sole proprietorships, partnerships, corporations
C) corporations, partnerships, sole proprietorships
D) corporations, sole proprietorships, partnerships
28) From the highest percentage to the lowest percentage, the percentage of revenues earned by
businesses in the United States is represented by which of the following?
A) sole proprietorships, partnerships, corporations
B) partnerships, corporations, sole proprietorships
C) corporations, partnerships, sole proprietorships
D) corporations, sole proprietorships, partnerships
29) From the highest percentage to the lowest percentage, the percentage of profits earned by businesses
in the United States is represented by which of the following?
A) sole proprietorships, partnerships, corporations
B) partnerships, corporations, sole proprietorships
C) corporations, partnerships, sole proprietorships
D) corporations, sole proprietorships, partnerships
30) Before its IPO, Twitter was an example of a private firm. As a private firm, Twitter was
A) not subject to government regulations and taxation.
B) run by stockholders and a board of directors.
C) run by its founders, Evan Williams, Noah Glass, Jack Dorsey, and Biz Stone.
D) not legally allowed to raise funds through venture capital firms.
31) The limited ability to raise funds is a disadvantage for
A) sole proprietorships and partnerships.
B) partnerships and corporations.
C) sole proprietorships and corporations
D) corporations.
32) Unlimited personal liability is a disadvantage for
A) sole proprietorships and partnerships.
B) partnerships and corporations.
C) sole proprietorships and corporations
D) corporations.
33) The possible double taxation of income is a disadvantage for
A) sole proprietorships and partnerships.
B) partnerships and corporations.
C) sole proprietorships and corporations
D) corporations.
34) Limited personal liability is an advantage for
A) sole proprietorships and partnerships.
B) partnerships and corporations.
C) sole proprietorships and corporations
D) corporations.
35) The ability to share work and share risk is an advantage for
A) sole proprietorships and partnerships.
B) sole proprietorships.
C) sole proprietorships and corporations.
D) partnerships.
36) Anything owed by a person or a firm is
A) an asset.
B) a liability.
C) wealth.
D) owner’s yield.
37) Of the different types of businesses, a ________ has the most government rules and the most
government regulations affecting it.
A) corporation
B) partnership
C) sole proprietorship
D) All of the above are subject to the same amount of rules and regulations.
38) Which of the following statements is true?
A) Corporations can issue stocks and bonds, while proprietorships cannot.
B) Corporations have one owner, while proprietorships have many owners.
C) Corporations face fewer taxes than do proprietorships.
D) Proprietorships have limited liability while corporations have unlimited liability.
39) Assume you and your cousin Vinny set up a partnership and your lawyer tells you that as the
owners you will each face unlimited liability. What does that mean?
A) You are each liable for organizing the business.
B) Each of you could stand to lose your personal wealth if the business goes bankrupt.
C) There is no legal responsibility of the business in case a customer sues, as the business is legally
untouchable.
D) None of these explain what unlimited liability means.
40) How do the owners of a corporation relate to the business?
A) The owners and the business are not separate legal entities.
B) The owners and the business are separate legal entities.
C) The assets of the owners are considered the same as the assets of the business.
D) None of these describe the legal relationship of the owners to the business.
41) The decline in starting new businesses
A) is not concentrated in one industry.
B) is concentrated primarily in high-tech industries.
C) is concentrated primarily in health care industries.
D) is concentrated primarily in public service industries.
42) The decline in starting new businesses
A) is not concentrated in one geographic area.
B) is concentrated in the Northeast states.
C) is concentrated in the Gulf Coast states.
D) is concentrated in the Rust Belt.
43) In the early 1800s, many state legislatures began to pass general incorporation laws, which
A) allowed firms to more easily be organized as corporations.
B) made it harder for firms to organize as corporations.
C) granted sole proprietorships and partnerships limited personal liability.
D) allowed sole proprietorships and partnerships to issue stock.
44) If the personal assets of the owners can be claimed if the business is bankrupt, the owners are said to
have
A) unlimited liability.
B) a corporation type of business.
C) limited liability.
D) separation of ownership from control.
45) Which of the following is not an advantage of starting a new business as a partnership?
A) The owners have complete control over the business.
B) A partnership has few government rules and regulations to comply with.
C) Business profits are only taxed once, not twice.
D) A partnership can easily attain additional funding.
46) Torrie is thinking of starting up a small business selling hand-painted wine glasses. She is
considering setting up her business as a corporation. What is one advantage to Torrie of setting up her
business as a corporation?
A) By setting up the business as a corporation, Torrie would not face double taxation.
B) By setting up the business as a corporation, Torrie would have the ability to share risk with
shareholders.
C) By setting up the business as a corporation, Torrie would have both ownership and control over the
business.
D) All of the above would be advantages of setting up her business as a corporation.
47) Torrie is thinking of starting up a small business selling hand-painted wine glasses. She asks her
sister, Lisette, if she’d like to join her in setting up a partnership to start the business. What is one
disadvantage in joining the partnership that Lisette should consider?
A) Lisette should realize that her profits in the partnership will always be less than Torrie’s profits, since
Torrie had the idea to start the business.
B) Lisette should realize that, as an owner of the business, she will be personally responsible for the
debts of the business.
C) Lisette should realize that only Torrie will be allowed to own stock in the business as the founding
partner.
D) Lisette should realize that Torrie will have complete control over the business because it was her
idea.
48) Which of the following is an advantage of starting a new business as a sole proprietorship?
A) double taxation
B) ease in setting up
C) limited liability
D) greater ability to raise funds
49) In the United States, ________ profits are taxed at both the corporate level and when investors
receive dividends.
A) a sole proprietor’s
B) a partnership’s
C) corporate
D) all of the above
50) Of the types of business organizations in the United States, sole proprietorships account for the
________ percentage of firms and the ________ percentage of profits.
A) smallest; smallest
B) smallest; largest
C) largest; smallest
D) largest; largest
51) Of the types of business organizations in the United States, partnerships account for the ________
percentage of firms and ________ percentage of profits.
A) smallest; the smallest
B) smallest; neither the largest nor smallest
C) largest; the smallest
D) largest; neither the largest nor smallest
52) Of the types of business organizations in the United States, corporations account for ________
percentage of firms and ________ percentage of profits.
A) the smallest; the largest
B) smallest; neither the largest nor smallest
C) neither the largest nor smallest; the largest
D) the largest; the largest
53) Of the types of business organizations in the United States, corporations account for ________
percentage of revenues and ________ percentage of profits.
A) the smallest; the largest
B) largest; neither the largest nor smallest
C) neither the largest nor smallest; the largest
D) the largest; the largest
54) Most app developers have adopted the business model of
A) charging a small fee for their apps to be downloaded.
B) allowing their apps to be downloaded and used for free, while trying to still earn money from users.
C) charging a between $1.99 and $2.99 for their apps to be downloaded.
D) allowing their apps to be downloaded to one device for free, but charging a high price for the apps to
be downloaded to additional devices.
55) What is an outside director?
A) a member of the board of directors who does not have a direct management role in the firm
B) a member of a corporate board of directors that is also a manager of the business
C) the CEO that is selected by the corporation’s board of directors
D) a board of director chair who has been in the job for less than one year
56) Julie is the chief executive officer (CEO) of the Black Gold Corporation and is also on the company’s
board of directors. Julie is considered ________ of the corporation.
A) a stockholder
B) an inside director
C) an owner
D) an outside director
57) Garrison is the chief financial officer (CFO) of the Colorado Drone manufacturing company and is
also on the company’s board of directors. Garrison is considered ________ of the company.
A) a bondholder
B) an inside director
C) a financier
D) an outside director
58) Anita is the retired president of Claddagh College and currently serves on the board of directors of
the Patrician Pharmaceutical Company. Anita is considered ________ of the company.
A) a managing director
B) an inside director
C) a silent partner
D) an outside director
59) Humberto is the chief operational officer (COO) of the SodaSopa Company and currently serves on
the board of directors of the Helium Company of America. Humberto is considered ________ of the
Helium Company of America.
A) a managing director
B) an inside director
C) an unpaid advisor
D) an outside director
60) Who selects the board of directors of a corporation?
A) stockholders
B) bondholders
C) upper management
D) all of the above
61) The person hired by a corporation’s board of directors to ________ is known as the chief executive
officer.
A) chair the board of directors
B) run the day-to-day operations of the corporation
C) audit the financial records of the corporation
D) hire additional members for the board of directors
62) Unlike a sole proprietorship, a corporation’s shareholders
A) own the firm and directly manage it as well.
B) own the firm but do not directly manage it.
C) do not own the firm but directly manage it.
D) do not own the firm and do not directly manage it.
63) A member of a corporate board of directors that does not have a direct management role in the firm
is known as
A) a shareholder.
B) an inside director.
C) an outside director.
D) a corporate governor.
64) The shareholders of a corporation
A) are inside directors of the corporation.
B) are only comprised of top management for a large corporation.
C) directly manage the corporation.
D) elect a board of directors to represent their interests.
65) ________ are the owners of a corporation.
A) The board of directors
B) Stockholders
C) Top management
D) Bondholders
66) The CEO of Dynadyne corporation has been more concerned with enhancing his lifestyle by having
the company pay for expensive corporate retreats than he has been with increasing the value of the
company’s stock. In this situation, the CEO is ________ and the stockholders are ________.
A) the principal; the agents
B) the agent; the principals
C) an agent; also agents
D) a principal; also principals
67) In many corporations, the managers of the corporation run the corporation, although the
shareholders own the corporation. In this situation,
A) there are no inside directors on the board of directors.
B) there is separation of ownership from control.
C) there are no outside directors on the board of directors.
D) there is no corporate governance.
68) Jack Dorsey is the Chief Executive Officer of Twitter as well as a member of Twitter’s board of
directors. Dorsey is therefore classified as an
A) inside director.
B) outside director.
C) independent director.
D) unbiased director.
69) Included on the board of directors of Twitter are Peter Currie, president of Currie Capital LLC, the
CEO of 1stdibs.com David Rosenblatt, and PureTech Health senior independent director Marjorie
Scardino. These three board members do not have a direct management role with Twitter and are
therefore referred to as
A) inside directors.
B) outside directors.
C) competitive directors.
D) honorary directors.
70) Some corporate governance experts believe that serving on a company’s board of directors for an
extended length of time ________that member’s independence from the company’s CEO. If this is true,
it would tend to ________ the principal-agent problem.
A) enhances; increase
B) diminishes; increase
C) has no impact on; increase
D) diminishes; decrease
71) When a business is set up as a partnership, the owners of the business face limited liability.
72) The only type of business that faces unlimited liability is a corporation.
73) In the United States, corporate profits are taxed at the corporate level but are not taxed as personal
income in the form of dividend payments.
74) An asset is anything of value owned by a person or firm.
75) The only type of business that faces limited liability is a partnership.
76) In the United States, sole proprietorship profits are taxed at the business level and then are taxed
again as personal income in the form of dividend payments.
77) Corporations are legally owned by their board of directors.
78) Corporate governance refers to the way in which a corporation is structured and the effect that
structure has on the corporation’s behavior.