Question 1

The principal-agent problem can be described as:&#10;A)Managers will always try to pursue enough profits to keep stockholders satisfied.&#10;B)The owner acts as the agent of the firm and the manager is the principal who controls the firm.&#10;C)If shareholders cannot effectively monitor the managers' behavior, managers may be tempted to use the firm's assets for their own ends.&#10;D)All of the above&#10;E)None of the above.

Accepted Answer

The principal-agent problem refers to the conflict of interest that arises between those who own a company (shareholders) and those who run the company (managers). The managers may be tempted to use the firm's assets for their own benefit if they cannot be held accountable by the shareholders. This creates an asymmetric information problem in which shareholders cannot effectively monitor the managers' behavior. Option A is incorrect because managers may not always prioritize enough profits to keep shareholders satisfied. Option B is incorrect because in reality, the owner (shareholder) is the principal who controls the firm and delegates management responsibilities to the manager (agent).

Question 2

Capitalism is an economic system of business based on public enterprise.

Accepted Answer

Capitalism is an economic system of business based on private enterprise.

Question 3

Which is perhaps the most important advantage of the corporate business form?&#10;A)Easy to start up.&#10;B)Double taxation for shareholders can be avoided.&#10;C)Running a corporation is usually not very expensive.&#10;D)Access to the capital market.&#10;E)None of the above is an important advantage.

Accepted Answer

Access to the capital market is perhaps the most important advantage of the corporate business form. Unlike other business forms, corporations can issue stocks and bonds to raise capital from a large number of investors, making it easier to fund growth and expansion.

Question 4

Solutions to the principal-agent problem are incentives and monitoring

Accepted Answer

Incentives and monitoring are the primary solutions to address the principal-agent problem, where the principal (e.g. employer or shareholder) experiences a misalignment of interests with the agent (e.g. employee or manager) who is responsible for carrying out tasks on the principal's behalf. Providing appropriate incentives (e.g. performance-based pay) and monitoring the agent's actions (e.g. performance evaluations) can help to align interests and reduce the potential for shirking or other opportunistic behavior by the agent.

Question 5

The main goal of a company is to create an environment conducive to earning long-term profits.

Accepted Answer

The main goal of a company is to make a profit so that it can continue to operate and grow in the long term. Earning long-term profits is the ultimate objective of a business.

Question 6

The owners of corporations act as agents for the firm and bear unlimited personal liability.

Accepted Answer

The owners of corporations have limited personal liability, meaning that their personal assets are typically protected from the debts and liabilities of the corporation.

Question 7

In general, basic forms of business can be ___.&#10;A)a sole proprietorship&#10;B)a partnership&#10;C)a corporation&#10;D)All of the above.&#10;E)None of the above.

Accepted Answer

All three of these options (sole proprietorship, partnership, and corporation) are basic forms of business. Sole proprietorship is a business owned and operated by one person, partnership is a business owned by two or more individuals who share profits and liabilities, and corporation is a legal entity owned by shareholders.

Deck 1: Corporations and Corporate Governance