Deck 7: Firm Organization and Market Structure

Question 1

Limited liability is a benefit available only to

A)sole proprietorships.
B)partnerships.
C)corporations.
D)All of the above.

Answer 1

corporations.

Question 2

A firm sets its output where

A)marginal profit minus marginal cost equals zero (MP - MC = 0).
B)marginal revenue minus marginal profit equals zero (MR - MP = 0).
C)marginal revenue minus marginal cost equals zero (MR - MC = 0).
D)marginal revenue minus marginal cost is greater than zero (MR - MC > 0)

Answer 2

marginal revenue minus marginal cost equals zero (MR - MC = 0).

Question 3

A small business owner earns $50,000 in revenue annually. The explicit annual costs equal $30,000. The owner could work for someone else and earn $25,000 annually. The owner's business profit is ________ and the economic profit is ________.

A)$20,000, $20,000
B)$20,000, -$5,000
C)$25,000, -$5,000
D)$25,000, $20,000

Answer 3

$20,000, -$5,000

Question 4

The board of a U.S. corporation usually includes

A)outside directors.
B)executives of competitors.
C)non-executive employees of the corporation.
D)All of the above.

Question 5

The board of a U.S. corporation usually includes

A)outside directors.
B)company executives.
C)former politicians.
D)All of the above.

Question 6

A small business owner earns $75,000 in revenue annually. The explicit annual costs equal $40,000. The owner could work for someone else and earn $20,000 annually. The owner's accounting profit is ________ and owner's economic profit is ________.

A)$10,000, $10,000
B)$35,000, $10,000
C)$35,000, $55,000
D)$10,000, $55,000

Question 7

Which entity produces the greatest proportion of U.S. gross national product?

A)government
B)non-profit organizations such as hospitals
C)firms
D)universities

Question 8

A firm sets its output where

A)marginal profit is zero.
B)marginal revenue is maximized.
C)marginal profit equals marginal revenue.
D)marginal profit is maximized.

Question 9

If marginal revenue equals marginal cost, the firm is maximizing profits as long as

A)the resulting profits are positive.
B)marginal cost exceeds marginal revenue for greater levels of output.
C)the average cost curve lies above the demand curve.
D)All of the above are required.

Question 10

Economists typically assume that the owners of firms wish to

A)produce efficiently.
B)maximize sales revenues.
C)maximize profits.
D)All of the above.

Question 11

If a firm traded on the New York Stock Exchange posts an accounting profit of $10 million, then the firm is making a positive economic profit

A)only if the Securities and Exchange Commission (SEC)approves the accounting report.
B)only if the firm's opportunity cost is less than $10 million.
C)only if the firm's opportunity benefit is more than $10 million.
D)only if the firm's management receives stock compensation.

Question 12

What is one of the biggest differences between a sole proprietorship and a corporation?

A)Sole proprietorships offer stock.
B)Corporation shareholders elect the managers of the firm.
C)Sole proprietorships have limited liability.
D)Corporations are the only profitable firms.

Question 13

In which governance form do shareholders own the company?

A)public sector
B)state-owned enterprise
C)corporation
D)non-profit

Question 14

A firm's profit is

A)usually negative when opportunity costs are included.
B)the difference between marginal revenue and marginal cost.
C)the opportunity cost of the firm's shareholders.
D)the difference between revenue and cost.

Question 15

If a firm makes zero economic profit, then the firm

A)has total revenues greater than its economic costs.
B)must shut down.
C)can be earning positive business profit.
D)must have no fixed costs.

Question 16

If a firm goes out of business because of negative economic profits, its books

A)might indicate a positive accounting profit.
B)might indicate that opportunity costs were zero.
C)might indicate that taxes are too high.
D)might suggest a mistaken value of explicit costs.

Question 17

A ________ is a governance structure where owners are not personally liable.

A)sole proprietorship
B)partnership
C)mixed enterprise
D)corporation

Question 18

A mixed enterprise is one

A)where the government has significant ownership in a private company.
B)in which the company has more than one legal structure, such as limited liability and sole proprietorship.
C)that combines for-profit activities with education.
D)that has both for-profit and non-profit operations.

Question 19

Which of the following generally does NOT seek to maximize profit?

A)public sector companies
B)corporations
C)partnerships
D)sole proprietorships

Question 20

An organization that converts inputs (like Labor, Capital etc.)into output can be a

A)firm.
B)sole proprietorship.
C)corporation.
D)All of the above.

Question 21

By shutting down, a firm

A)stops receiving revenue but continues to pay variable costs.
B)stops receiving revenue and is stuck with its fixed costs.
C)avoids its sunk costs as well as its variable costs.
D)can avoid paying taxes on its previously earned profits.

Question 22

If a firm is operating at an output level where losses are minimized the firm

A)has no incentive to stay in the industry.
B)is better of exiting the industry.
C)is maximizing profits.
D)will shut down

Question 23

The above figure shows the cost curves for a competitive firm. If the profit-maximizing level of output is 40, price is equal to

A)$0.
B)$15.
C)$10.
D)$11.

Question 24

The above figure shows the cost curves for a competitive firm. If the market price is $15 per unit, the firm will earn profits of

A)$0.
B)$4.
C)$40.
D)$160.

Question 25

If a competitive firm maximizes short-run profits by producing some quantity of output, which of the following must be TRUE at that level of output?

A)p = MC
B)MR = MC
C)p ≥ AVC
D)All of the above

Question 26

If a competitive firm cannot earn a profit at any level of output during a given short-run period, then which of the following is FALSE?

A)It will shut down in the short run and wait until the price increases sufficiently.
B)It will exit the industry in the long run.
C)It will operate at a loss in the short run.
D)It will minimize its loss by decreasing output so that price exceeds marginal cost.

Question 27

A firm bought a pizza oven for $13,500 and if it shut down now, could sell the oven for $9,500. Which of the following statements is TRUE?

A)The relevant cost of the oven when considering shutting down is $13,500.
B)The relevant cost of the oven when considering shutting down is $9,500.
C)The relevant cost of the oven when considering shutting down is $4,000.
D)The cost of the oven does not matter when deciding whether or not to shut down.

Question 28

If a profit-maximizing firm finds that, at its current level of production, MR < MC, it will

A)decrease output.
B)increase output.
C)shut down.
D)operate at a loss.

Question 29

The above figure shows the cost curves for a competitive firm. The firm will incur economic losses if the price is less than

A)$0.
B)$5.
C)$10.
D)$11.

Question 30

In deciding whether to operate in the short run, the firm must consider the relationship between price and

A)total cost.
B)average variable cost.
C)total fixed cost.
D)the number of buyers.

Question 31

If a profit-maximizing firm finds that, at its current level of production, MR > MC, it will

A)earn greater profits than if MR = MC.
B)increase output.
C)decrease output.
D)shut down.

Question 32

If a short-run fixed cost is sunk, then

A)losses can be minimized by shutting down.
B)the firm should keep producing to cover the sunk cost.
C)the cost cannot be avoided by shutting down.
D)Both B and C.

Question 33

If a competitive firm maximizes short-run profits by producing some quantity of output, which of the following must be TRUE at that level of output?

A)p > MC
B)MR > MC
C)p ≥ AVC
D)All of the above

Question 34

A firm will shut down in the short run if

A)total fixed costs are too high.
B)total revenue from operating would not cover all costs.
C)total revenue from operating would not cover variable costs.
D)total revenue from operating would not cover fixed costs.

Question 35

If the present value of all future profit is positive, then

A)the firm should remain operating, even if it earns negative profit in the short run.
B)the firm should shut down if it is earning a negative profit in the short run.
C)the firm should shut down if it cannot cover its fixed costs in the short run.
D)None of the above.

Question 36

The above figure shows the cost curves for a competitive firm. If the firm is to earn economic profit, price must exceed

A)$0.
B)$5.
C)$10.
D)$11.

Question 37

A firm should always shut down if its revenue is

A)declining.
B)less than its average fixed costs.
C)less than its total costs.
D)less than its avoidable costs.

Question 38

If a manager is unsure what the entire profit function looks like, then she can

A)decrease output slightly to see if profits increase.
B)increase output slightly to see if profits increase.
C)Both A and B.
D)None of the above.

Question 39

The above figure shows the cost curves for a competitive firm. The firm will shut down in the short run if price falls below

A)$5.
B)$10.
C)$11.
D)$15.

Question 40

The above figure shows the cost curves for a competitive firm. If the firm is to operate in the short run, price must exceed

A)$0.
B)$5.
C)$10.
D)$11.

Question 41

If the market price in a competitive market is below the minimum of average variable cost the firm will shut down.

Question 42

If the present value of all future revenue is positive, then

A)the firm should remain operating, even if it earns negative profit in the short run.
B)the firm should shut down if it is earning a negative profit in the short run.
C)the firm should shut down if it cannot cover its fixed costs in the short run.
D)Unable to determine with the information given.

Question 43

A common incentive owners offer managers is

A)the year-end bonus.
B)stock options.
C)profit sharing.
D)All of the above.

Question 44

Corporate Social Responsibility

A)is illegal in most countries.
B)minimizes conflict between owners and managers.
C)is the pursuit of social objectives by corporations.
D)disputes the stakeholder theory of R. Edward Freeman.

Question 45

Monitoring a manager can be difficult if

A)the owner and manager do not have an enforceable contract.
B)the owner cannot easily observe the manager's actions.
C)the manager doesn't have to use a time clock.
D)the board does not have enough outside directors.

Question 46

A firm's vertical dimension refers to

A)its ability to grow its profits.
B)the size of its headquarters building.
C)the degree to which it participates in the various stages of producing the products and services it sells.
D)the downstream stages of production.

Question 47

Monitoring is often used by firms in an attempt to decrease

A)shirking.
B)piece rates.
C)adverse selection.
D)signaling.

Question 48

If manager performance is easily observable then

A)profits will be maximized for the firm.
B)the owner can directly reward the manager.
C)the manager will attempt to manipulate the reported profit.
D)the firm's stock price will go up.

Question 49

Even though fixed costs do not affect the output decision, an increase in fixed costs results in a wider range of prices for which the firm operates at a loss.

Question 50

A company that undertakes an activity so that it can "do well by doing good" is practicing

A)strategic corporate social responsibility.
B)altruistic corporate social responsibility.
C)profit sharing.
D)the survivor principle.

Question 51

A conflict between an owner and a manager may occur when

A)the manager earns more when the firm has higher profits.
B)the manager is seeking to maximize leisure time.
C)the owner can easily observe the manager slacking off and punish him accordingly.
D)the firm is very small and the manager must perform multiple tasks.

Question 52

Stock options

A)are a type of contingent reward.
B)allow you to pay people only $1 in salary.
C)force CEOs to try and maximize the share price in the short run.
D)All of the above.

Question 53

If a firm cannot earn profits in the short run, it will shut down.

Question 54

One problem with compensation systems is that

A)sometimes a manager is rewarded for an objective other than maximizing profits.
B)managers are often paid too much.
C)owners sometimes want to pursue social objectives.
D)the Dodd-Frank Act of 2010 requires shareholder votes on compensation that are non-binding.

Question 55

According to the survivor principle

A)firms will get taken over by their larger rivals over time.
B)only firms that maximize profits survive in highly competitive markets.
C)managers only work hard if they are threatened with their survival at the firm.
D)eventually all firms merge to become one large monopoly.

Question 56

Ronald McDonald Houses is an example of

A)altruistic corporate social responsibility.
B)reduction in shareholder value.
C)vertical integration.
D)strategic corporate social responsibility.

Question 57

The agency problem can be avoided if

A)the firm is not subject to regulation by a government agency.
B)the manager and owner can manipulate reported profit.
C)the firm has positive profits.
D)the goals of the owner and manager are aligned.

Question 58

If a firm doesn't make an economic profit it will shut down.

Question 59

If a firm sets marginal revenue equal to marginal cost it will make an economic profit.

Question 60

A firm's horizontal dimension refers to

A)its size in its primary market.
B)its size in all markets in which is competes.
C)the level of supply chain integration the firm undertakes.
D)the number of stages in the production process that are upstream from the stages the firm undertakes.

Question 61

A McDonald's franchise is an example of

A)horizontal integration.
B)quasi-vertical integration.
C)a vertical merger.
D)None of the above.

Question 62

According to economists, competitive firms

A)compete for the same customers.
B)are price takers.
C)differentiate their products.
D)are able to change output and affect the market price.

Question 63

Vertically integrated firms can use transfer pricing

A)to avoid government price controls.
B)as a way to compensate managers for transferring among departments in a vertically integrated firm.
C)to avoid paying market prices for inputs.
D)to shift profit.

Question 64

Opportunistic behavior may occur when

A)a firm buys its inputs from multiple suppliers.
B)firms incur significant transaction costs when negotiating contracts.
C)a firm backwards vertically integrates.
D)a firm can buy a key component from only one supplier.

Question 65

Vertical integration

A)is always driven by profitability concerns.
B)results in lower transaction costs.
C)may be undertaken to avoid government regulations.
D)hampers timely delivery of inputs into the production process.

Question 66

An oligopoly

A)requires government licensing.
B)has relatively few firms, but they are still price takers.
C)always collude to keep prices high.
D)has barriers to entry.

Question 67

A firm that backward vertically integrates

A)moves downstream in the production process.
B)requires that the production process be relatively simple.
C)has to merge with another firm.
D)may be producing its own inputs.

Question 68

Vertical restraints in a contract

A)are generally illegal in the U.S.
B)usually benefit the firm that produces the raw inputs to the production process.
C)are used in vertical mergers.
D)can approximate the outcome of a vertical merger.

Question 69

Firms might vertically disintegrate when

A)it becomes more profitable for a firm to specialize.
B)the IRS cracks down on transfer pricing.
C)the industry becomes too large to support itself.
D)the industry shrinks in size.

Question 70

A firm that is vertically integrated

A)participates in more than one successive stage of production.
B)has higher profits than firms that are not vertically integrated.
C)produces all of its own inputs.
D)relies on other firms to market its products.

Question 71

Market structure depends upon

A)the ease of entry and exit.
B)the ability of firms to differentiate their goods and services.
C)the number of firms in the market.
D)All of the above.

Question 72

Vertical integration can

A)lower transaction costs due to lower costs of writing and enforcing contracts.
B)increase management costs and complexity.
C)reduce problems between owners and managers.
D)All of the above.

Question 73

Supply chain management refers to

A)the contracts put in place to manage a firm's suppliers.
B)the decisions around which stages of production to handle internally and which to buy from others.
C)how the firm compensates the employees who work on the firm's internal stages of production.
D)the 19th century practice of having barges move downstream with the flow of the river.

Question 74

All of the following are characteristics of an oligopolistic market EXCEPT

A)firms must consider the actions of their rivals.
B)cartels eventually form to keep prices high.
C)firms have the ability to influence prices.
D)firms earn lower profits than a monopoly.

Question 75

In a monopolistically competitive market

A)firms are price setters.
B)barriers to entry are high.
C)firms earn positive economic profit in the long run.
D)products are undifferentiated.

Question 76

Toyota's just-in-time system is an example of

A)backward (upstream)integration.
B)quasi-vertical integration.
C)using transfer pricing to avoid price controls.
D)horizontal, downstream integration.

Question 77

A monopoly

A)must have a patent to protect its products.
B)is a price taker.
C)produces the market output.
D)doesn't lose any sales when it raises its price.

Question 78

Under perfect competition

A)information about prices is hard to obtain.
B)there is a maximum number of firms that can enter the market.
C)if a firm exits the market, price will rise.
D)transaction costs are low.