Question 1

A golf club manufacturer pays its workers based on the number of sets of clubs they produce. This firm
A)organizes production based on a command system.
B)does not have a principal-agent problem.
C)is a sole proprietorship.
D)organizes production based on an incentive system.
E)is a corporation.

Accepted Answer

The fact that workers are paid based on the number of sets of clubs they produce indicates that the firm organizes production based on an incentive system, where workers are incentivized to produce more to earn more.

Question 2

A firm with two or more owners who have unlimited liability is
A)a sole proprietorship.
B)a partnership.
C)a conglomerate.
D)a corporation.
E)a public company.

Accepted Answer

A partnership is a type of business structure in which two or more owners share in the profits, risks, and liabilities of the company. In a partnership, each partner has unlimited liability, meaning they are personally responsible for all debts and legal issues that may arise, just as in a sole proprietorship. Therefore, option B is the correct answer. Option A, a sole proprietorship, refers to a business owned by one person with unlimited liability. Option C, a conglomerate, is a group of companies that operate in different industries. Option D, a corporation, is a separate legal entity with limited liability for its owners (shareholders). Option E, a public company is a type of corporation that issues stocks to the public to raise capital.

Question 3

A sole proprietorship
A)dies with the owner.
B)is the same as a partnership.
C)always bring a higher return to its owner than a corporation brings to its owners.
D)is a not-for-profit firm.
E)has a complex management structure.

Accepted Answer

A sole proprietorship is a business that is owned and operated by a single individual. Unlike a corporation or partnership, there is no separate legal entity in a sole proprietorship, and thus the business dies with the owner.

Question 4

Mr. Brown opens his restaurant as a sole proprietorship. After a year of disastrous reviews, he has gone deeply into debt. His liability is
A)zero; he has already lost all his money.
B)the amount of his original investment.
C)limited only by his entire wealth.
D)limited to assets owned by the restaurant.
E)depends upon how much money he has in his savings account.

Accepted Answer

In a sole proprietorship, the owner has unlimited liability, meaning Mr. Brown is personally responsible for all debts, potentially risking his entire personal wealth.

Question 5

The possibility that an employee may not work hard is an example of the
A)limited liability problem.
B)principal-agent problem.
C)transactions cost problem.
D)technological efficiency problem.
E)partnership problem.

Accepted Answer

The principal-agent problem arises when one party (the principal) hires another party (the agent) to carry out tasks on their behalf, but there is a conflict of interest between the two parties. The employee may not work hard because they are not directly financially incentivized to do so, leading to a conflict of interest between the employer and employee. This is a classic example of the principal-agent problem.

Question 6

The principal-agent problem exists when
A)there is no command system in place.
B)firms operate as sole proprietorships.
C)agents do not act in the best interest of principals.
D)principals do not act in the best interest of agents.
E)the future value of money is more than its current value.

Accepted Answer

The principal-agent problem arises when the agent (an individual or a group of individuals) do not take decisions that are in the best interest of the principal (the owner or shareholders of the firm). The agents may prioritize their own interests or have incomplete information, leading to an asymmetry of information between the principal and the agent. This problem is commonly observed in corporations where managers act on behalf of the shareholders, creating a potential conflict of interest.

Question 7

Typical examples of a partnership would include which one of the following?
A)a law firm
B)a corner drugstore
C)an automobile manufacturer
D)a bank
E)a freelance writer

Accepted Answer

A law firm is a typical example of a partnership as it consists of two or more lawyers working together as partners.

Answer: B 
 A corner drugstore is not a typical example of a partnership as it is usually owned and operated by a single individual or a corporation.

Answer: C 
 An automobile manufacturer is not a typical example of a partnership as it is usually owned and operated by a corporation.

Answer: D 
 A bank is not a typical example of a partnership as it is usually owned and operated by a corporation.

Answer: E 
 A freelance writer is not a typical example of a partnership as freelancers usually work independently and do not typically form partnerships.

Question 8

It is a disadvantage of ________ that retained profits are taxed twice. It is a disadvantage of ________ that bad decisions are not checked by the need for consensus.
A)a sole proprietorship; both a partnership and a sole proprietorship
B)a corporation; a sole proprietorship
C)both a partnership and a sole proprietorship; a partnership
D)a corporation; both a partnership and a sole proprietorship
E)both a corporation and a partnership; a sole proprietorship

Accepted Answer

The disadvantage of a corporation is that retained profits are taxed twice, while the disadvantage of a sole proprietorship is that bad decisions are not checked by the need for consensus. Therefore, the correct answer is B.

Question 9

Federal Express enters into contracts with independent truck operators who offer FedEx service and who are rewarded by the volume (cubic feet)of packages they carry. FedEx does not hire more independent drivers because
A)it is concerned about a possible downturn in the economy and the effects of overexpansion.
B)it cannot afford more trucks and more drivers.
C)of the principal-agent problem.
D)it is a corporation, so it wants to have a limited number of independent truck owners operating as proprietorships.
E)trucks are not a technologically efficient method of transporting parcels.

Accepted Answer

The principal-agent problem refers to the potential conflict of interest between a principal (in this case, FedEx) and an agent (independent truck operators) who is hired to act on behalf of the principal. By hiring independent truck operators, FedEx avoids this problem because they are rewarded by the volume of packages they carry, which aligns their interests with those of FedEx. If FedEx were to hire more drivers as employees, there could be a potential conflict of interest between the drivers and the company, leading to higher costs and inefficiencies. Therefore, the best answer is C.

Question 10

Susan invests $1,000 to buy shares of TooNew stock. The company declares bankruptcy, leaving many debts unpaid, including Susan's $1,000 investment. Susan has a personal net worth of $50,000. What will be Susan's final net worth if TooNew has total unpaid debts of $30,000?
A)$19,000
B)$21,000
C)$49,000
D)$51,000
E)$20,000

Accepted Answer

Since Susan's investment of $1,000 is part of the total unpaid debts of $30,000, her net worth will decrease by $1,000. Therefore, her final net worth will be $50,000 - $1,000 = $49,000.

Question 11

Firms organize production by using
A)command systems only.
B)incentive systems only.
C)command and incentive systems.
D)market systems only.
E)principal-agent systems only.

Accepted Answer

Firms typically use a combination of command and incentive systems to organize production. Command systems set out firm-wide policies and procedures, while incentive systems motivate employees to meet firm goals and increase productivity. Firms may also use market systems to allocate resources and principal-agent systems to align the interests of managers and owners. However, these systems are typically used in conjunction with command and incentive systems. Therefore, the best answer is C.

Question 12

The profits of a sole proprietorship are
A)taxed twice.
B)subject to a corporate tax.
C)not taxed.
D)exempt from taxation.
E)treated as the owner's income.

Accepted Answer

The profits of a sole proprietorship are not subject to a separate corporate tax. Instead, they are treated as the income of the owner and are taxed accordingly on their personal income tax return.

Question 13

Which one of the following is an advantage of a corporation relative to a proprietorship or partnership?
A)Owners have limited liability.
B)Profits are taxed once.
C)difficult to raise money
D)no principal-agent problems
E)simple management structure

Accepted Answer

The advantage of a corporation over a proprietorship or partnership is that the owners have limited liability, meaning their personal assets are protected in case the business faces any legal or financial issues. This is not the case in a proprietorship or partnership where the owners are personally liable for any business debts or losses.

Question 14

Most establishments in Canada
A)employ between 5 and 99 people.
B)employ more than 100 people.
C)employ fewer than 5 people.
D)employ more than 500 people.
E)are partnerships.

Accepted Answer

The answer of Most establishments in Canada
A)employ between 5 and...

Question 15

Use the information below to answer the following questions.
Fact 10.3.1 Executive Pay
Executive compensation, based on performance, can theoretically constrain pay, but companies are paying their top executives more and more. The median compensation of a CEO in 2013 was $13.9 million, up 9 percent from 2012
Source: CNBC, April 28, 2014
-Refer to Fact 10.3.1. CEO compensation schemes are designed to solve
A)the principal-agent problem.
B)the problem of CEOs without long-term labour contracts.
C)the problem of slow and expansive decision-making in a complex management structure.
D)the problem that many CEOs lose all of their wealth if the corporation goes bankrupt.
E)the problem of the CEO being taxed twice-once on salary income and once on dividend income.

Accepted Answer

CEO compensation schemes are designed to solve the principal-agent problem, which arises when the interests of principals (i.e. shareholders) and agents (i.e. CEOs) are not aligned, leading to potential conflicts of interest. By linking executive pay to performance, CEOs are incentivized to act in the best interest of the company and its shareholders. The other options are not relevant to the issue of executive compensation.

Question 16

Firms cope with uncertainty and incomplete information by using
A)sole proprietorship, limited liability, and market coordination.
B)ownership, incentive pay, and long-term contracts.
C)team production, economies of scale, and transactions costs.
D)the market, the firm, and internal organization.
E)team production, economies of scale, and transaction costs.

Accepted Answer

Firms use ownership, incentive pay, and long-term contracts to align interests, motivate performance, and manage risks associated with uncertainty and incomplete information.

Question 17

A firm with one or more owners of limited liability is
A)a sole proprietorship.
B)a partnership.
C)a conglomerate.
D)a corporation.
E)a public company.

Accepted Answer

A firm with limited liability suggests the presence of a legal entity that is separate from its owners, which is a characteristic of a corporation. Sole proprietorships and partnerships do not provide limited liability protection, while conglomerates and public companies are broader terms that do not necessarily indicate limited liability.

Question 18

Firm strategies for coping with the principal-agent problem are
A)ownership, incentive pay, and long-term contracts.
B)sole proprietorship, partnership, and the corporation.
C)economies of scale, scope, and team production.
D)technology, information, and the market.
E)ownership, scope, and the market.

Accepted Answer

Ownership can align the interests of the principal and the agent, incentive pay can motivate the agent to work towards the principal's objectives, and long-term contracts can provide security and alignment of interests over an extended period of time. These strategies can help mitigate the principal-agent problem.

Question 19

In a partnership, each partner is legally liable for
A)all the debts of the partnership.
B)the fraction of the debts corresponding to the fraction of ownership.
C)50 percent of the debt.
D)all debts of the partnership limited by the personal wealth of the partner.
E)an amount of debt limited to the amount of the partner's investment in the partnership.

Accepted Answer

The answer of In a partnership, each partner is legally...

Question 20

What is a disadvantage of a corporation relative to a sole proprietorship or partnership?
A)Owners have unlimited liability.
B)Profits are taxed twice: as corporate profits and as dividend income and capital gains to stockholders.
C)high cost of capital
D)perpetual life
E)dies with the owner

Accepted Answer

The disadvantage of a corporation is that profits are taxed twice: as corporate profits and as dividend income and capital gains to stockholders. This double taxation can result in less money for shareholders compared to a sole proprietorship or partnership.

Quiz 10: Organizing Production

A golf club manufacturer pays its workers based on the number of sets of clubs they produce. This firm

A firm with two or more owners who have unlimited liability is

A sole proprietorship

Mr. Brown opens his restaurant as a sole proprietorship. After a year of disastrous reviews, he has gone deeply into debt. His liability is

The possibility that an employee may not work hard is an example of the

The principal-agent problem exists when

Typical examples of a partnership would include which one of the following?

It is a disadvantage of that retained profits are taxed twice. It is a disadvantage of that bad decisions are not checked by the need for consensus.

Federal Express enters into contracts with independent truck operators who offer FedEx service and who are rewarded by the volume (cubic feet) of packages they carry. FedEx does not hire more independent drivers because

Susan invests $1,000 to buy shares of TooNew stock. The company declares bankruptcy, leaving many debts unpaid, including Susan's $1,000 investment. Susan has a personal net worth of $50,000. What will be Susan's final net worth if TooNew has total unpaid debts of $30,000?

Firms organize production by using

The profits of a sole proprietorship are

Which one of the following is an advantage of a corporation relative to a proprietorship or partnership?

Most establishments in Canada

Firms cope with uncertainty and incomplete information by using

A firm with one or more owners of limited liability is

Firm strategies for coping with the principal-agent problem are

In a partnership, each partner is legally liable for

What is a disadvantage of a corporation relative to a sole proprietorship or partnership?