modules 2-4 practice problems

Question 1

On the production possibilities frontier, production is efficient if the production point is

Answer 1

on the frontier

Question 2

Which of the following statements are false?
A. As long as people have the same skill sets, there will be trading opportunities.
B. Productivity increases as people specialize.
C. People specialize in the good or service in which they have a comparative advantage.
D. Trade allows for the possibility of a free lunch.
E. A middleman buys from a trader at the ask and sells to another at the bid.
F. All are true.

Answer 2

-As long as people have the same skill sets, there will be trading opportunities
-A middleman buys from a trader at the ask and sells to another at the bid

Question 3

Which of the following is NOT a basic assumption economists consider in microeconomics?
A. Market participants are goal-oriented.
B. Market participants confront scarce resources.
C. Time is free.
D. Market participants will trade only when they have an absolute advantage.
E. Market participants engage in rational behavior.
F. None of the above are correct

Answer 3

-Time is free
-Market participants will trade only when they have an absolute advantage

Question 4

Sunk costs are generally the same as which of the following costs
A. implicit costs
B. explicit costs
C. accounting costs
D. opportunity costs
E. economic costs
F. None of the above are correct

Answer 4

None

Question 5

Snoop Dogg wins a movie ticket in a contest on the radio. If Snoop Dogg decides to use the ticket and goes to the movie, what is the implicit cost that he incurs? Select one or more correct answers
A. The cost of popcorn and soda that he buys at the theater.
B. The cost of other activities that he could have done instead of being at the movie.
C. The cost of commuting to the movie theater and back.
D. He does not incur any implicit costs because the ticket is free.
E. The price of the ticket for the movie.
F. None of these are an implicit cost Snoop Dogg incurs

Answer 5

The cost of other activities that he could have done instead of being at the movie

Question 6

Suppose the explicit cost of buying a new car is $15,000 and the implicit cost of buying a new car is $2,000. What then is the opportunity cost of buying a new car in dollars?

Answer 6

$17,000

Question 7

Which of the following do economists assume about market participants?
A. Market participants are not necessarily rational because they often display random patterns of behavior.
B. Despite an unknown future, market participants weigh expected benefits against costs when they make
decisions.
C. Individuals must make choices no matter how wealthy because we all face scarcity of some kind.
D. Giving to charity is irrational.
E. Market participants pursue goals.
F. None of these choices are an assumption economists make

Answer 7

-Despite an unknown future, market participants weigh expected benefits against costs when they make decisions
-Individuals must make choices no matter how wealthy because we all face scarcity of some kind.
-Market participants pursue goals

Question 8

If two firms were to trade with each other, where would the gains from trade be illustrated on the production possibilities frontier

Answer 8

At a point outside the PPF

Question 9

Which of the following statements are false
A. Fiat money has intrinsic value.
B. Money acts as a medium of exchange, a unit of account, and store of value.
C. Barter suffers from a coincidence of wants problem and numerous pricing pairs.
D. Commodity money acts as a medium of exchange and has intrinsic value.
E. Desirable properties of money include portability, divisibility, uniformity, and fungibility.
F. Money should be difficult to counterfeit and have a high value-to-weight ratio.
G. All are true

Answer 9

Fiat money has intrinsic value

Question 10

Which of the following are true if Ludacris has an absolute advantage in the production of microphones over that of 50 Cent?

Answer 10

Ludacris can produce more microphones than 50 Cent

Question 11

Which of the following statements about the principle of comparative advantage are true?
A. Producers should specialize in the production of goods which have the lowest internal price.
B. Producers should specialize in the production of goods for which they have a lower opportunity cost.
C. Producers should specialize in the production of goods which they can produce with fewer resources.
D. Producers should specialize in the production of goods they enjoy consuming.
E. Producers should specialize in the production of goods that have a lower explicit cost to produce.
F. None of these statements are true.

Answer 11

-Producers should specialize in the production of goods which have the lowest internal price
-Producers should specialize in the production of goods for which they have a lower opportunity cost

Question 12

Under what conditions can an individual’s consumption possibilities frontier be outside of their existing production possibilities frontier?
A. If there is a technological advance.
B. If additional resources become available.
C. If the individual specializes and engages in trade.
D. If a middleman uses their information to facilitate trade.
E. If the individual produces their maximum output.
F. None of the above are correct.

Answer 12

-If there is a technological advance
-If additional resources become available
-If the individual specializes and engages in trade
-If a middleman uses their information to facilitate trade

Question 13

Eminem is captaining a freighter crossing Lake Michigan. After departing Duluth, he realizes his ship is under-fueled. He must decide whether to call a tugboat service or instruct the crew to use their personal
floatation devices, swim to shore, and use a colleague’s ship to refuel their ship the next day. Which of the following are sunk costs incurred by Eminem?

Answer 13

-The insurance policy on the freighter
-The cost of the personal flotation devices
-The fuel he burned since departing Duluth

Question 14

Which of the following statements are false:
A. Specialization leads to increased productive output.
B. Middlemen facilitate trade.
C. Absolute advantage leads to specialization.
D. Money solves the limitations of barter.
E. The slope of a production possibility frontier characterizes opportunity costs.
F. Scarcity necessitates trade-offs.
G. All are true

Answer 14

Absolute advantage leads to specialization

Question 15

The amount that firms plan to produce during a given time period at a particular price is the _______.
A. demand
B. supply
C. quantity demanded
D. quantity supplied
E. equilibrium price
F. None of these choices correctly complete the sentence

Answer 15

quantity supplied

Question 16

A good whose demand increases as income increases is a _______________.
A. substitute good
B complementary good
C. normal good
D. inferior good
E. elastic good
F. None of these choices correctly complete the sentence

Answer 16

normal good

Question 17

If the price of a good falls, there is a _____________ the demand curve.
A. rightward shift of
B. leftward shift of
C. movement down along
D. movement up along
E. change in the slope of
F. None of these choices correctly complete the sentence.

Answer 17

movement down along

Question 18

A demand schedule shows the relationship between the quantity demanded of a commodity over a
given period of time and __________________.
A. the tastes of the consumers
B. the price of related commodities
C. the income of consumers
D. the price of the commodity
E. the quantity supplied of the commodity
F. None of these choices correctly complete the sentence

Answer 18

the price of the commodity

Question 19

If the price per bushel of corn increased from $5 to $6 because of a poor harvest, then __________.
A. the demand for corn decreases
B. the quantity supplied of corn increases
C. the quantity demanded of corn decreases
D. the supply of corn increases
E. the demand for corn increases
F. None of these choices correctly complete the sentence

Answer 19

the quantity demanded of corn decreases

Question 20

The law of supply states that, other things remaining the same, _________________.
A. firms will produce more of a good the higher its price
B. firms will produce more of a good the less it costs to produce it
C. firms will produce less of a good as the required resources become scarcer
D. firms will produce less of a good the more it costs to produce it
E. firms will produce more of a good as competitors exit the marketplace
F. None of these choices correctly complete the sentence

Answer 20

firms will produce more of a good the higher its price

Question 21

The demand for a good is elastic if _______________.
A. a decrease in its price results in a decrease in total expenditure
B. the good is a necessity
C. the good is a substitute
D. an increase in its price results in an increase in total expenditure
E. an increase in its price results in a decrease in total expenditure
F. None of these choices correctly complete the sentence

Answer 21

an increase in its price results in a decrease in total expenditure

Question 22

The price elasticity of demand measures _________________
A. the slope of a supply curve
B. how often the price of a good changes
C. how responsive the quantity demanded is to changes in price
D. how sensitive the quantity demanded is to changes in demand
E. how sensitive the quantity demanded is to changes in supply
F. None of the above is the single best answer

Answer 22

how responsive the quantity demanded is to changes in price

Question 23

The price of a bottle of water rises from $1 to $2, resulting in the quantity demanded to fall from
700,000 to 500,000 bottles. Which of the following is true?
I. The demand for bottled water is inelastic.
II. The demand for bottled water is elastic.
III. The supply of bottled water is elastic.
IV. Consumers are relatively insensitive to price changes in bottled water

Answer 23

I and IV

Question 24

If the price of a substitute to good A increases, then __________________.
A. the demand for good A will decrease
B. the demand for good A will increase
C. the demand for good A will not change
D. the market price for good A will decrease
E. the supply of good A will decrease
F. None of these choices correctly complete the sentence

Answer 24

the demand for good A will increase

Question 25

Which of the following would NOT be a determinant of demand?
I. the price of inputs used to produce the good
II. the tastes of consumers
III. the income of consumers
IV. the price of related goods

Answer 25

I only

Question 26

Which of the following pairs of goods are most likely substitutes?
A. lettuce and salad dressing
B. DVD’s and DVD players
C. pancakes and syrup
D. tuna fish and gasoline
E. margarine and butter
F. None of the above is the single best answer

Answer 26

margarine and butter

Question 27

A complement is a good that is ________________.
A. of higher quality than another good
B. of lower quality than another good
C. of the same quality of another good
D. used in conjunction with another good
E. used instead of another good
F. None of these choices correctly complete the sentence

Answer 27

used in conjunction with another good

Question 28

Wheat is the main input in the production of flour. If the price of wheat increases, all else equal, we
would expect _______________________.
A. the supply of flour to increase
B. the supply of flour to decrease
C. the supply of flour to be unaffected
D. the demand for flour to increase
E. the demand for flour to be unaffected
F. None of these choices correctly complete the sentence.

Answer 28

-the supply of flour to decrease
-the demand for flour to be unaffected

Question 29

Rolex Watch expects a recession to occur. Knowing that a Rolex is a normal good, you predict that
the demand for a Rolex _______________________.
A. will remain unchanged
B. will increase
C. will decrease
D. might increase or decrease
E. might increase, decrease, or remain unchanged
F. None of these choices correctly complete the sentence

Answer 29

will decrease

Question 30

Determining the mix of debt and equity to be used to finance a firm is a ___________________.
A. capital budgeting decision
B. working capital management decision
C. capital structure decision
D. stakeholder decision
E. agency decision
F. None of these choices correctly complete the sentence

Answer 30

capital structure decision

Question 31

The owner of a sole proprietorship ______________________.
A. has unlimited legal liability only if she is actively involved in the daily operations of the
business
B. is personally liable for all of the company’s debts
C. has created an organization with an unlimited life
D. suffers from double taxation
E. can easily transfer ownership
F. None of these choices correctly complete the sentence.

Answer 31

is personally liable for all of the company’s debts

Question 32

Which one of the following statements concerning partnerships is correct?
A. All partners enjoy limited liability if they create a general partnership of equal shares.
B. A limited partner actively participates in running the partnership daily.
C. A general partnership terminates whenever one general partner decides to sell her share of
the business.
D. A general partnership has an unlimited life while a limited partnership has a limited life.
E. A limited partnership is limited to two partners
F. None of the above is the single best answer

Answer 32

A general partnership terminates whenever one general partner decides to sell her share of the business

Question 33

Which one of the following statements concerning corporations is correct?
A. The bylaws set forth the rules describing how a corporation regulates its existence.
B. The articles of incorporation include the procedures to be followed for electing corporate directors.
C. Corporate income is taxed only when it distributes dividends to shareholders.
D. A corporation is the easiest form of business entity to create.
E. The board of directors is entitled to all the residual profits.
F. None of the above is the single best answer

Answer 33

The bylaws set forth the rules describing how a corporation regulates its existence

Question 34

The goal of financial management is to maximize the current ______________________.
A. net income of the firm
B. dividends per share
C. resources of the firm
D. value of the existing stock
E. working capital of the firm
F. None of these choices correctly complete the sentence

Answer 34

value of the existing stock

Question 35

The Sarbanes-Oxley Act in 2002, was adopted primarily to _________________.
A. eliminate costly accounting reports
B. replace the need for accounting audits by external auditors
C. protect investors from corporate abuse
D. protect corporate directors from legal liability
E. replace internal auditors with external auditors
F. None of these choices correctly complete the sentence

Answer 35

protect investors from corporate abuse

Question 36

The management of a firm’s long-term debt and equity is referred to as ___________________.
A. capital structure management
B. capital budgeting
C. working capital management
D. investment management
E. operations management
F. None of these choices correctly complete the sentence

Answer 36

capital structure management

Question 37

Which of the following are disadvantages of a corporation?
A. double taxation
B. ease of business formation
C. limited equity
D. unlimited life
E. separation of owners and management
F. None of the above is the single best answer.

Answer 37

-double taxation
-separation of owners and management

Question 38

A limited liability company pays tax like a corporation.
A. true
B. false

Answer 38

false

Question 39

Which one of the following represents a potential agency problem?
A. adherence to the Sarbanes-Oxley Act in 2002
B. hiring a manager and compensating her with shares of company stock
C. paying a management bonus based on the number of employees managed
D. paying all company earnings out to shareholders in the form of dividends
E. retaining all company earnings in the business
F. None of the above is the single best answer

Answer 39

paying a management bonus based on the number of employees managed

Question 40

If you buy shares of stock in a corporation from your mother via the NYSE, you are ____________.
A. violating the Sarbanes-Oxley Act of 2002
B. participating in the secondary market
C. engaging in a proxy transaction
D. creating an agency conflict
E. issuing shares
F. None of these choices correctly complete the sentence

Answer 40

participating in the secondary market

Question 41

The management of a firm’s accounts receivables is referred to as ________________.
A. capital structure management
B. capital budgeting
C. working capital management
D. investment management
E. corporate management
F. None of these choices correctly complete the sentence

Answer 41

working capital management

Question 42

Which of the following statements are correct?
A. All partners enjoy limited liability in a limited partnership.
B. Profits of sole proprietorships are taxed similarly to those of partnerships.
C. Both partnerships and corporations have unlimited lives.
D. An owner of a sole proprietorship has limited liability.
E. Owners of C-corporations have limited liability while those of S-corporations do not.
F. None of the above is the single best answer

Answer 42

Profits of sole proprietorships are taxed similarly to those of partnerships

Question 43

Which of the following are taxed at the personal level while providing limited liability for all of its
owners?
A. general partnership
B. limited partnership
C. S-corporation
D. sole proprietorship
E. C-corporation
F. None of the above is the single best answer

Answer 43

S-corporation

Question 44

Which of the following are most apt to create an agency problem?
A. Allowing the CEO to own shares of the company’s stock.
B. Providing free air travel for corporate executives to attend the annual shareholders’ meeting.
C. Granting stock bonuses to all employees within the firm.
D. Paying the CEO a salary based on the growth rate of the firm’s sales.
E. Reimbursing employees for business-related expenses.
F. None of the above is the single best answer

Answer 44

Paying the CEO a salary based on the growth rate of the firm’s sales

Question 45

A corporation borrows money using _____________.
A. its own name
B. the name of one of its directors
C. the name of its CEO
D. the name of the chairman of the Board
E. the name of a designated employee
F. None of these choices correctly complete the sentence

Answer 45

its own name

Question 46

17. Ronald Coase sold 500 shares of Oshkosh stock on the New York Stock Exchange. This transaction
    _________________.
    A. took place in the primary market
    B. was a public offering
    C. took place in a secondary market
    D. involved a proxy
    E. was a private placement
    F. None of these choices correctly complete the sentence.

Answer 46

took place in a secondary market

Question 47

Which of the following are cash flows from a corporation into the financial markets?
A. repayment of long-term debt
B. payment of government taxes
C. payment of loan interest
D. payment of a quarterly dividend
E. issuing a bond in the primary market
F. None of the above is the single best answer.

Answer 47

-repayment of long-term debt
-payment of loan interest
-payment of a quarterly dividend

Question 48

Which of the following represent cash outflows from a corporation?
A. issuance of securities
B. new loan proceeds
C. payment of dividends
D. issuance of bonds
E. paying employee wages and benefits
F. None of the above is the single best answer

Answer 48

-payment of dividends
-paying employee wages and benefits

Question 49

Which of the following represent cash inflows into a corporation?
A. payment for employee wages
B. hiring a new employee
C. a stock buy-back
D. purchasing new equipment
E. a sale to a customer
F. None of the above is the single best answer

Answer 49

a sale to a customer

Question 50

Gene Fama is interested in purchasing Robert Shiller’s factory. Since Gene is a poor negotiator, so he hires Lars Hansen to negotiate the purchase price. Identify the parties to this transaction.
A. Gene is the principal and Lars is the agent.
B. Robert is the principal and Lars is the agent.
C. Robert is the principal and Gene is the agent.
D. Lars is the principal and Gene is the agent.
E. Lars is the principal and Robert is the agent.
F. None of the above is the single best answer

Answer 50

Gene is the principal and Lars is the agent

Question 51

Which one of the following is the best description of the goal of a financial manager in a public corporation whose shares trade on exchanges such as the NYSE and NASDAQ?
A. Maximize profits over the short-term.
B. Maximize sales over the short-term.
C. Avoid financial distress.
D. Maintain steady earnings growth.
E. Maximize the current value per share.
F. None of the above is the single best answer

Answer 51

Maximize the current value per share

Question 52

Capital budgeting is the process of ____________________.
A. determining how to raise the money required to fund a project
B. deciding how much cash to keep on hand
C. deciding how much of earnings a firm should retain
D. planning and managing the firm’s long-term investments
E. deciding what marketable securities to purchase
F. None of these choices correctly complete the sentence

Answer 52

planning and managing the firm’s long-term investments

Question 53

Which of the following refer to the mix of financing a firm uses?
A. working capital
B. debt
C. investment capital
D. net capital
E. capital structure
F. None of the above is the single best answer

Answer 53

capital structure

Question 54

A stakeholder is _______________.
A. a person who owns shares of stock
B. any person who has voting rights based on stock ownership of a corporation
C. a person who initially founded a firm and currently has management control over that firm
D. a supplier to whom a firm currently owes money
E. any party, other than a capital provider, which has a claim on the cash flows of a firm
F. None of the above is the single best answer

Answer 54

-a supplier to whom a firm currently owes money
-any party, other than a capital provider, which has a claim on the cash flows of a firm

Question 55

Which form of business structure do we most associate with agency problems?
A. sole proprietorship
B. general partnership
C. limited partnership
D. corporation
E. limited liability company
F. None of the above is the single best answer.

Answer 55

corporation

Question 56

Which one of the following is an agency cost?
A. increasing the quarterly dividend
B. investing in a new project that creates firm value
C. hiring outside accountants to audit the company’s financial statements
D. accepting an investment opportunity that will add value to the firm
E. closing a division of the firm that is operating at a loss
F. None of the above is the single best answer

Answer 56

hiring outside accountants to audit the company’s financial statements

Question 57

Which one of the following is a means by which shareholders can replace company management?
A. stock options
B. poison pill
C. Sarbanes-Oxley Act
D. agency play
E. proxy fight
F. None of the above is the single best answer

Answer 57

proxy fight

Question 58

Which one of the following parties has ultimate control of a corporation?
A. chairman of the board
B. board of directors
C. chief executive officer
D. chief operating officer
E. shareholders
F. None of the above is the single best answer

Answer 58

shareholders

Question 59

Why should financial managers strive to maximize the current value per share of the outstanding stock?
A. Doing so guarantees the company will grow in size at the maximum possible rate.
B. Doing so increases employee salaries.
C. Because they have been hired to represent the interests of the current shareholders.
D. Because this will increase the current dividends per share.
E. Because managers often receive shares of stock as part of their compensation.
F. None of the above is the single best answer

Answer 59

Because this will increase the current dividends per share