Entrepreneurship and Effective Small Business Management, 11e, Global Edition
(Scarborough)
Chapter 23 The Legal Environment: Business Law and Government Regulation
1) Something of legal value that the parties exchange as part of a bargain.
A) Contract
B) Legality
C) Agreement
D) Consideration
2) A contract entered into by a(n) ________ person can be void, voidable, or valid, depending on
the mental state of the person.
A) minor
B) insane
C) intoxicated
D) All of the above
3) What are, if any, the possible defenses against a valid contract which may cause it to be
unenforceable?
A) Genuineness of assent and form
B) Control and offer
C) Agreement and legal
D) Agreement and offer
4) ________ law governs the rights and the obligations between people and the parties they
made promises to or agreements with.
A) Agency
B) Contract
C) Freedom of contract
D) UCC
5) A(n) ________ is a promise or a set of promises for the breach of which the law gives a
remedy, or the performance of which the law recognizes as a duty.
A) agreement
B) UCC
C) warranty
D) contract
6) To have an agreement, a contract must have:
A) a promise by one party to do something in the future.
B) the ability to contract.
C) an intention to be bound by the contract.
D) an offer and an acceptance.
7) To have a valid offer, there must be:
A) an intention to be bound by the offer.
B) a simple lack of disagreement by the offeree.
C) a written communication of the offer.
D) significant and substantial consideration.
8) The terms of the ________ must be defined and reasonably certain.
A) offer
B) consideration
C) payment
D) None of the above
9) On October 1, Althea writes Katherine a letter offering her a job at her travel agency.
Katherine mails Althea a letter on October 2 accepting the offer. On October 3, before she
receives Katherine’s acceptance, Althea calls Katherine to rescind the offer. In terms of contract
law:
A) there is no contract since Althea calls to rescind the offer before she receives Katherine’s
acceptance.
B) a contract is formed on October 2 when Katherine mails the letter of acceptance to Althea.
C) no contract is formed since Katherine does not respond by the fastest means available—
telephone.
D) None of these are correct.
10) Maria writes a letter offering to sell some office furniture to Lee. Lee, in a distant city, sends
a telegram to Maria accepting the offer. Because of an error in the Western Union Office, the
telegram never reaches Maria. What is the result?
A) There is no contract since Lee responds by telegram instead of by mail.
B) There is no contract since Maria never actually receives Lee’s acceptance.
C) A contract is formed as soon as Lee gave the telegram to the Western Union office.
D) A contract is formed as soon as Maria writes the letter to Lee.
11) The courts use the presence or absence of a(n) ________ to distinguish between serious
promises and those that are not serious.
A) consideration
B) contractual capacity
C) agreement
D) written communication
12) The ________ rule says that an offeree’s acceptance must be the mirror image of the offeror’s
offer.
A) mirror image
B) promissory estoppel
C) mailbox
D) consideration
13) In most cases dealing with the issue of consideration, courts:
A) still consider a promise binding even if made without a consideration.
B) do not evaluate the adequacy of the consideration.
C) consider offers of “love and affection” to be valuable consideration.
D) weigh the value of the consideration in ruling on the validity of the contract.
14) In terms of contractual capacity:
A) a minor can disaffirm and walk away from a contract even if already executed and the minor
has benefited from it.
B) intoxicated individuals are generally always held liable for their contractual obligations,
regardless of their condition upon execution of the contract.
C) an insane person can never have contractual capacity by definition.
D) if a minor benefits from a contract and then disaffirms it, he/she must fulfill the duty of
restoration.
15) Al voluntarily becomes intoxicated at a local bar. He sells his car for half of its value simply
to irritate his wife. Later when sober, Al and his wife want the car back. This contract:
A) is void because of a lack of genuineness of assent.
B) is voidable.
C) is unenforceable due to duress and undue influence.
D) cannot be voided by Al or his wife.
16) Rupert, a very old man, suffers from bouts of senility. During a lucid moment, he contracts
to buy a new freezer from a local appliance dealer. This contract is:
A) void.
B) voidable.
C) enforceable.
D) illegal.
17) Toni wants to buy software from Bill that she can modify in order to hack into her
boyfriend’s e-mail account to see if he’s writing to another woman. When Bill discovers why
Toni wants the software, he refuses to sell it to her. Toni sues Bill in small claims court. Is the
contract valid?
A) Yes, because a verbal contract is binding.
B) No, because of the principle of legality.
C) Yes, because of promissory estoppel.
D) No, because Toni is clearly crazy.
18) The owner of a small auto repair shop knowingly installs a used water pump in your car and
tells you it is “brand new.” This is:
A) fraud.
B) duress.
C) innocent misrepresentation.
D) breach of contract.
19) ________ serves as a check on the parties’ agreement, verifying that it is genuine and not
subject to mistakes, misrepresentation, fraud, duress, or undue influence.
A) An attorney
B) Notary public
C) Genuineness of assent
D) None of the above
20) Which of the following statements is correct?
A) A service mark is any distinctive word, phrase, symbol, or trade dress that a company uses to
identify the origin of a product or to distinguish it from other goods on the market.
B) A trademark is any distinctive word, phrase, symbol, design or trade dress that a company
uses to identify the origin of a product or to distinguish it from other goods on the market.
C) A service mark identifies and distinguishes the source of a service.
D) Both B and C
21) Sonny is buying a computer system for his college’s administrative functions. The negotiated
price of the system is $475, 000. He receives a contract for $375,000 with no explanation as to
the change and gladly signs it and sends it back to the vendor. He receives a phone call from the
vendor explaining that the secretary in typing the figures into the contract hit the 3 instead of the
4 on her keyboard. Sonny wants to hold the vendor to the contract. Is the contract legally binding
on the contractor?
A) Yes, because it constitutes a written offer.
B) No, because of a lack of genuineness of assent on the part of the vendor.
C) Yes, because of the law of agency covers the secretary as well as the salesperson.
D) No, because this constitutes a mistake of fact that Sonny should have immediately
recognized.
22) Jack started his business in the year 2000. Due to lack of planning and bad cash flow, Jack
files for bankruptcy and the business ceases to exist. This is a form of:
A) liquidation.
B) reorganization.
C) repayment plan.
D) temporary repayment plan.
23) Gusti agrees to maintain Mrs. Poppendraius’s yard, pulling weeds, cutting the grass weekly,
and trimming the shrubbery once during the summer for $30 a month. Gusti makes a half-hearted
attempt at pulling weeds, cuts the lawn once all summer and never touches the shrubbery. No
damage is done except that Mrs. Poppendraius’s yard appears neglected and unkempt. In terms of
contract law:
A) Gusti is not contractually obligated because he is a minor.
B) Mrs. Poppendraius may collect compensatory damages.
C) Gusti is in breach of contract.
D) Mrs. Poppendraius may collect consequential damages.
24) The damages the parties to a contract specify in case of breach are called:
A) liquidated damages.
B) monetary damages.
C) compensatory damages.
D) consequential damages.
25) ________ is a remedy for breached contracts that deal with unique items and is designed to
make the injured party “whole again.”
A) Consequential damage
B) Specific performance
C) Remedy at law
D) Monetary damage
26) Which of the following contracts would be covered by the Uniform Commercial Code?
A) The sale of accounting services
B) The sale of real estate
C) The sale of furniture
D) All of the these
27) The Uniform Commercial Code:
A) significantly revised Merchant Law.
B) is based on case law and overturns much of the common law that merchant law was based on.
C) makes minor changes to merchant law, largely making the law more uniform and consistent.
D) is the most significant revision of commercial law since the Napoleonic Code.
28) Ansel, a sugar manufacturer, agrees to sell Keith 10,000 pounds of sugar at the “usual price.”
A shortage forces the price of sugar up and Ansel charges Keith nearly 50% more for the sugar.
In response, Keith disaffirms the contract. Which ruling is correct?
A) The modification is enforceable because Ansel has the right to unilaterally modify the
contract.
B) The Code would confirm the contract and assign a price reasonable at the time of shipment.
C) Keith would be permitted to void the contract since he has not agreed to the price increase.
D) This contract is not covered by the Code, therefore, the common law applies and the
modification is unenforceable.
29) The UCC requires that:
A) the sale of all goods and services be warranted.
B) only written contracts for the sales of goods over $1,500 are enforceable.
C) verbal contracts are as enforceable as written contracts, regardless of the amount of the
consideration.
D) no new consideration need be offered if a contract is modified in good faith.
30) What type of warranty does a seller create when making statements about the condition,
quality, and performance of the good that the buyer substantially relies on?
A) Sales warranty
B) Verbal warranty
C) Express warranty
D) Warranty of merchantability
31) If a contract for the sale of goods omits the place for delivery, the Code states that delivery
will take place at:
A) the seller’s place of business.
B) the seller’s residence.
C) the buyer’s place of business.
D) the buyer’s residence.
32) Under the UCC, when the innocent specifies their own damages for a potential breach of a
sales contract and they are reasonable and not punitive, these damages are called:
A) consequential damages.
B) liquidation damages.
C) compensatory damages.
D) specific damages.
33) A(n) ________ insures a buyer that the goods will be of average quality and that they are fit
for the ordinary purposes for which such goods are used.
A) implied warranty of merchantability
B) implied warranty of fitness for a particular purpose
C) express warranty
D) warranty of title
34) The statute of limitations for a breach of contract suit is ________ years from the time the
breach occurred.
A) 2
B) 3
C) 4
D) 7
35) A ________ is a promise or statement of fact by the seller about a product.
A) sales warranty
B) sales contract
C) copyright
D) contractual capacity
36) A(n) ________ assures the buyer of a product that it will be of average quality, not the best
and not the worst.
A) implied warranty
B) warranty of exclusivity
C) express warranty
D) warranty of merchantability
37) Which of the following phrases is sufficient to disclaim an implied sales warranty?
A) “No warranties”
B) “Seller makes no warranties on this product whatsoever”
C) “As is”
D) None of the above. A merchant cannot disclaim sales warranties.
38) Today, when it comes to product liability, the courts:
A) practice the caveat emptor rule.
B) rule that the scope of warranties include any person incurring personal or property loss due to
a faulty product.
C) hold that the rule of caveat venditor is valid in all cases.
D) hold that only the parties directly involved in the execution of the contract are bound by the
law of sales warranties.
39) Billy Bob’s swamp racers are the fastest swamp mud racing machines in the country.
Unfortunately drivers have to be careful because they are easily tipped over due to their high
center of gravity. This is unfortunate because most swamp mud racers consider stability an
important quality in their racers. Billy Bob has installed numerous decals in prominent places
that state, “This sucker turns over easily but goes really fast.” Still, Billy Bob could be sued for
product liability under:
A) negligent manufacturing.
B) failure to warn.
C) implied warranty to perform.
D) negligent design.
40) When Fred Goodman sued Wendy’s over his broken tooth due to bone fragments in his
hamburger, he sued them on the basis of:
A) breach of implied warranty of merchantability.
B) negligent manufacturing.
C) failure to warn and negligent design.
D) implied warranty of fitness.
41) We Love Pets manufactures a pet carrier that is known to suddenly come apart if the pet
shakes itself at the same time the owner picks the carrier up. It seems the combination of actions
make the hinge pins fall out. WLP could be liable under:
A) negligent manufacturing.
B) failure to warn.
C) implied warranty to perform.
D) negligent design.
42) A ________ is a grant giving the inventor of a product the exclusive right to make, use, or
sell it for a specific time.
A) patent
B) copyright
C) trademark
D) warranty
43) The first step in receiving a patent for the invention is to:
A) document the device.
B) search existing patents.
C) establish the invention’s novelty.
D) prove the origination of the idea.
44) A ________ is any distinctive work, symbol, name, logo, etc., that a company uses to
identify the origin of a product or to distinguish it from other products.
A) patent
B) copyright
C) trademark
D) warranty
45) The duration of a ________ is indefinite but can be lost if it loses its unique character.
A) patent
B) copyright
C) trademark
D) warranty
46) The author of a hit song could apply for a ________ to protect that work from unauthorized
use by others.
A) patent
B) trademark
C) servicemark
D) copyright
47) An agent’s duties when executing agency include:
A) reimbursement of the principal for all expenses incurred in the execution of the agency.
B) indemnification of the principal for any authorized payments or any loss incurred by the
agency.
C) performance of duties according to the principal’s instruction and notification of the principal
of all facts concerning the subject matter of the agency.
D) All of the above
48) ________ is the most common type of bankruptcy, accounting for nearly 70% of all
bankruptcies.
A) Chapter 7
B) Chapter 11
C) Chapter 13
D) Chapter 21
49) In a Chapter 7 bankruptcy:
A) a small firm gets a second chance by being protected from creditors while a reorganization
plan is formulated.
B) every piece of property the bankrupt debtor owns is subject to court attachment.
C) loss is limited to $100,000 in unsecured debt and to $350,000 in secured debt.
D) a debtor simply declares all of his firm’s debts, and turns all assets over to a trustee who then
sells and distributes them to settle both secured and unsecured debts.
50) A ________ bankruptcy provides a small firm a second chance; it protects a firm from
creditors while a reorganization plan is formulated.
A) Chapter 7
B) Chapter 11
C) Chapter 13
D) Chapter 21
51) A Chapter 11 filing can be
A) involuntary.
B) voluntary.
C) Both A and B
D) None of the above
52) The act that is the foundation on which antitrust policy in the United States is built is:
A) the Clayton Act.
B) the Sherman Anti-Trust Act.
C) the Robinson-Patman Act.
D) the Miller-Tydings Act.
53) The ________ forbids contracts that restrain trade or create monopolies.
A) Clayton Act
B) Sherman Anti-Trust Act
C) Robinson-Patman Act
D) Miller-Tydings Act
54) ________ states that a seller cannot require a buyer to purchase only his/her product to the
exclusion of other competitive sellers’ products.
A) The Clayton Act
B) The Sherman Act
C) The Robinson-Patman Act
D) The Miller-Tydings Act
55) The Clayton Act prohibits:
A) fair trade agreements.
B) sales contracts and warranties.
C) any corporation purchasing the stock of another corporation.
D) interlocking directorates.
56) This act was passed by Congress to supplement the Clayton Act, providing the power to
prevent “unfair methods of competition in commerce or unfair or deceptive acts in commerce.”
A) The Federal Trade Commission Act
B) The Sherman Act
C) The Robinson-Patman Act
D) The Miller-Tydings Act
57) ________ was passed to strengthen the Clayton Act, specifically to address price
discrimination because many businesses were circumventing the original rules.
A) The Federal Trade Commission Act
B) The Sherman Act
C) The Robinson-Patman Act
D) The Miller-Tydings Act