Question 1

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 situation where an agent (independent truck operator) may not always operate in the best interest of the principal (FedEx) and may pursue their own self-interest. This can create conflicts and result in lower quality service and performance. By rewarding the independent truck operators based on the volume of packages they carry, FedEx incentivizes them to maximize their performance and align their interests with the company's goals. Hiring more independent drivers may increase the complexity of monitoring and controlling their actions, leading to a greater potential for the principal-agent problem.

Question 2

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 type of business owned and operated by one person, therefore it dies with the owner.

Question 3

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 involve the use of explicit instructions and centralized decision-making to direct activities. Incentive systems, on the other hand, rely on rewards and punishments to motivate workers and shape their behavior. By using both of these systems, firms can ensure that workers are given clear guidance on what to do, while also having an incentive to work efficiently and effectively. Market and principal-agent systems may also be utilized, but they are not typically the primary means of organizing production within a firm.

Question 4

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 involves two or more lawyers coming together to form a business entity that provides legal services to clients.

Question 5

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

A corporation provides limited liability to its owners, meaning that their personal assets are protected from the company's debts or legal issues. This is an advantage over a proprietorship or partnership, where the owners are personally liable for the company's obligations.

Question 6

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 refers to the conflict of interest between a principal (e.g. a manager or business owner) and an agent (e.g. an employee) where the agent may not act in the best interest of the principal. This can include situations such as an employee not working hard or taking shortcuts that may harm the business.

Question 7

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 the golf club manufacturer pays its workers based on the number of sets of clubs they produce indicates that the firm organizes production based on an incentive system.

Question 8

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 aligns the interests of the principal and agent, as the agent has a stake in the success of the firm. Incentive pay provides a direct link between the agent's efforts and their compensation, which motivates them to work towards the goals of the firm. Long-term contracts ensure that the agent's behavior remains in line with the principal's interests, as they have a stake in the success of the firm over a longer period of time. So, all these three strategies together (ownership, incentive pay, and long-term contracts) can help to cope with the principal-agent problem.

Question 9

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 retained profits being taxed twice only applies to corporations, making option B the correct answer. The disadvantage of bad decisions not being checked by the need for consensus applies to both partnerships and sole proprietorships, so option A and C are incorrect. Option D and E are also incorrect as they do not accurately match the disadvantages with the types of businesses.

Question 10

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 relative to a sole proprietorship or partnership is that its profits are taxed twice: as corporate profits and as dividend income and capital gains to stockholders. This is known as double taxation. Sole proprietorships and partnerships only pay taxes on their individual income, not on business profits.

Question 11

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 12

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

Susan's net worth will decrease by $1,000 due to her investment in TooNew, but it will not be affected by the company's unpaid debts since they are separate from her personal finances. Therefore, her final net worth will still be $50,000.

Question 13

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 business entity in which two or more individuals share the ownership and management of the company, and are personally responsible for all of its debts and obligations. This means that the owners have unlimited liability, and can be held responsible for all debts and losses incurred by the partnership.

Question 14

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 agents, who are hired to act on behalf of principals, pursue their own interests rather than the interests of the principals. This can result in a misalignment of incentives and a loss of value for the principals.

Question 15

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 one or more owners of limited liability is a corporation. This is because corporations have the ability to limit the liability of their owners (shareholders) to the amount of their investment in the company. Other types of business structures, such as sole proprietorships and partnerships, do not offer limited liability protection. Conglomerates and public companies refer more to the size and scope of the company rather than their ownership structure.

Question 16

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 is the conflict of interest that may arise between the CEO (the agent) and shareholders (the principals). By aligning executive pay with company performance, it incentivizes the CEO to act in the best interest of the company and its shareholders.

Question 17

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 18

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 treated as the owner's income and are taxed at the personal income tax rate, as the business and the owner are considered the same entity. Therefore, option E is the correct answer.

Question 19

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

The answer of Mr.Brown opens his restaurant as a sole...

Question 20

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

The answer of Firms cope with uncertainty and incomplete information...

Quiz 10: Organizing Production

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 sole proprietorship

Firms organize production by using

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

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

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

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

Firm strategies for coping with the principal-agent problem are

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.

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

Most establishments in Canada

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 firm with two or more owners who have unlimited liability is

The principal-agent problem exists when

A firm with one or more owners of limited liability is

In a partnership, each partner is legally liable for

The profits of a sole proprietorship are

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

Firms cope with uncertainty and incomplete information by using