Question 1

A good example of a residual claimant is:
A)a consumer.
B)an worker on a fixed wage.
C)a stockholder.
D)an executive who doesn't earn bonuses when firm is doing well.

Accepted Answer

A residual claimant is someone who earns the profits or bears the losses of a business or investment. Stockholders are residual claimants of a company, as they earn dividends and capital gains if the company performs well, and bear losses if the company underperforms.

Question 2

An owner- operator firm is where:
A)the owner is the only worker on the premises.
B)the one who directs resources is the sole residual claimant.
C)the one who directs resources is hired by stockholders.
D)the owner can force workers to do what he wants.

Accepted Answer

An owner-operator firm is a type of business structure where the owner is the one who directs resources and is the sole residual claimant. This means that the owner has full responsibility for the operations of the business and bears all the financial risks and rewards of its success or failure. It does not necessarily mean that the owner is the only worker on the premises, nor does it give them the power to force workers to do what they want. The owner-operator model is commonly found in small businesses and can be contrasted with larger corporations where ownership and management are separated, and decisions are made by a board of directors.

Question 3

A residual claimant is:
A)a waste disposal expert.
B)the last person to be paid.
C)an owner- manager.
D)a disgruntled employee.

Accepted Answer

A residual claimant is the last person to be paid after all other obligations have been met, typically referring to shareholders or owners in a business context.

Question 4

Industries with large monitoring costs are likely to find that the Pareto- preferred structure is a:
A)mixture of corporate structures.
B)one- person firm.
C)multiperson firm.
D)partnership.

Accepted Answer

The answer of Industries with large monitoring costs are likely...

Question 5

Multiperson firms exist to reduce all of the following costs except:
A)legal.
B)transactions.
C)monitoring.
D)contracting.

Accepted Answer

Multiperson firms primarily exist to reduce transaction, monitoring, and contracting costs through internal coordination and economies of scale. Legal costs, however, are not a primary reason for the formation of multiperson firms; these costs can be associated with both solo and multiperson firms and do not necessarily decrease by forming a multiperson firm.

Question 6

In a two- person firm where both people are equally skilled, their collective income is most likely to be:
A)approximately twice their income in two one- person firms.
B)exactly twice their income in two one- person firms.
C)more than twice their income in two one- person firms.
D)less than twice their income in two one- person firms.

Accepted Answer

The answer of In a two- person firm where both...

Question 7

when monitoring costs are low and team productivity is high the Pareto preferred organizational form is
A)labor managed team
B)partnership
C)owner managed team
D)one person firm

Accepted Answer

When monitoring costs are low and team productivity is high, an owner-managed team is Pareto preferred because the owner can effectively monitor and incentivize high productivity without the need for complex sharing arrangements or the dilution of decision-making authority that can come with other organizational forms.

Question 8

Rosy Flour is a firm which produces flour from wheat. The output of Rosy Flour is:
A)not an input to other firms.
B)a specific input for other firms.
C)a generic input for other firms because many firms use some flour.
D)a generic input for other firms because all firms use some flour.

Accepted Answer

Flour is a generic input for other firms because many firms use some flour, such as bakeries, restaurants, and food manufacturers. Although Rosy Flour produces a specific type of flour from wheat, the use of flour is not limited to a specific industry or product, making it a generic input.

Question 9

Which of the following describes best a firm in which labourers hire capitalists?
A)a pharmaceutical company.
B)a book- of- the month club
C)a big car manufacturer
D)a law firm

Accepted Answer

In a law firm, particularly those that operate as partnerships, the laborers (lawyers) essentially hire the capitalists (investors or partners) to provide the capital needed for the firm's operations, while the lawyers themselves manage the firm and make key business decisions. This is a reversal of the traditional business model where capitalists hire laborers.

Question 10

In the case of specific inputs:
A)the firm producing the input is in a precarious bargaining position.
B)coase theorem does apply.
C)the firm buying the inputs is in a precarious bargaining position.
D)special contractual protection is not needed.

Accepted Answer

If the firm producing the input is in a precarious bargaining position, it means that they have limited negotiating power and may have to accept unfavorable terms. This implies that special contractual protection may be necessary to ensure that the firm is not taken advantage of by the buyer. Coase theorem does not directly apply in this situation as it assumes that both parties have equal bargaining power.

Question 11

The central question the organizational structure of the firm has to answer is:
A)how to best align the individual self- interest with the firm interests.
B)how to increase the values of the shares.
C)how to increase profits.
D)how to acquire the largest market share.

Accepted Answer

The organizational structure of the firm should be designed in a way that aligns the individual self-interest of employees with the interests of the firm as a whole. This will ensure that everyone is working towards the common goal of the company's success, which ultimately leads to increasing profits and value of shares. However, the primary focus should be on creating a culture where all employees work towards the long-term success of the company rather than just short-term goals like acquiring the largest market share or increasing profits.

Question 12

In the case of low team productivity and high monitoring costs:
A)a one- person firm is Pareto- preferred to partnerships.
B)there are no advantages for any organizational type.
C)an owner- managed firm is preferred to partnerships.
D)an owner- managed firm is preferred to a one- person firm.

Accepted Answer

The answer of In the case of low team productivity...

Question 13

The choice of producing within firms or across markets
A)is based on the magnitude of production costs only.
B)is based on the magnitude of transaction costs only.
C)depends to a large degree on the size of the firm.
D)will depend on the relative costs of the two options.

Accepted Answer

The choice of producing within firms or across markets depends on the relative costs of the two options. If the costs of producing within a firm (such as hiring employees, investing in equipment, etc.) are lower than the costs of producing across markets (such as finding suppliers, negotiating contracts, etc.), then it makes sense to produce within a firm. On the other hand, if the costs of producing across markets are lower than the costs of producing within a firm, then it makes sense to produce across markets. Ultimately, the best choice will depend on the specific circumstances of the situation.

Question 14

Transaction costs are:
A)the costs associated with coordination inside the firm.
B)the cost associated with coordination outside the firm.
C)total costs plus production costs.
D)total costs less production costs.

Accepted Answer

The answer of Transaction costs are:
A)the costs associated with coordination...

Question 15

The central hypothesis of the theory of the firm is that the firm chooses an organizational form that maximizes profits:
A)given capital requirements.
B)net of operating costs.
C)given market prices.
D)net of any transactions costs.

Accepted Answer

The central hypothesis of the theory of the firm is that the firm will choose an organizational form that maximizes profits net of any transaction costs. This means that the firm will consider not only the capital requirements and market prices, but also the costs of transactions such as hiring employees, contracting with suppliers, and negotiating with customers. Thus, the best choice is D, which takes into account all relevant factors.

Question 16

An input is specific, as opposed to generic if:
A)many firms use the specified input.
B)one firm uses the specified input.
C)no firms use the specified input.
D)all firms use the specified input.

Accepted Answer

A specific input is one that only one firm uses, as it is unique or customized to that particular firm's needs. Options A, C, and D do not accurately describe a specific input.

Question 17

If our theory of the firm suggests that joint production is more efficient than individual production and that firms exist as a solution to the maximization problem, which of the following is inconsistent with that theory?
A)specialization and division of labor
B)shirking
C)decreasing returns to scale
D)transaction costs

Accepted Answer

Shirking is inconsistent with the theory because it implies that individuals may not work as efficiently within a firm as the theory suggests, undermining the idea that joint production within firms is more efficient due to solutions to the maximization problem.

Question 18

In the modern theory of the firm, an important difference between individuals and firms is that firms are:
A)producers.
B)not natural entities.
C)characterized by a production function.
D)employers.

Accepted Answer

Individuals are natural entities while firms are not. Firms are created by humans through legal and economic arrangements, whereas individuals are part of the natural world. This distinction is important because it means that firms can be treated as separate entities with their own goals, objectives and decision-making processes, and can be analyzed using economic tools and theories.

Question 19

Team production and specialization both share one important feature in common because both are potentially more productive, both may account for the existence of firms. However there are important differences; which of the following is among them?
A)It is easier to evaluate individual productivity in teams.
B)It is easier to evaluate individual productivity in specialization.
C)Team production must be conducted in one firm.
D)It is easier to evaluate team than individual productivity.

Accepted Answer

The answer of Team production and specialization both share one...

Question 20

Deferred compensation is an aspect of many employment contracts. For example, workers sometimes receive a bonus for staying with the firm for some specified period of time. In which of the following situations is deferred compensation likely to be a feature of the employment contract?
A)The firm incurs little cost when it hires a new worker.
B)It takes new workers a considerable time to learn the job.
C)The work is routine and involves no learning on the job.
D)The work is extremely distasteful.

Accepted Answer

In situations where it takes new workers a considerable time to learn the job, the firm may offer deferred compensation as an incentive for employees to stay with the company and continue to improve their skills and knowledge. This helps the firm to retain valuable employees and reduce turnover costs.

Quiz 19: The Theory of the Firm

A good example of a residual claimant is:

An owner- operator firm is where:

A residual claimant is:

Industries with large monitoring costs are likely to find that the Pareto- preferred structure is a:

Multiperson firms exist to reduce all of the following costs except:

In a two- person firm where both people are equally skilled, their collective income is most likely to be:

when monitoring costs are low and team productivity is high the Pareto preferred organizational form is

Rosy Flour is a firm which produces flour from wheat. The output of Rosy Flour is:

Which of the following describes best a firm in which labourers hire capitalists?

In the case of specific inputs:

The central question the organizational structure of the firm has to answer is:

In the case of low team productivity and high monitoring costs:

The choice of producing within firms or across markets

Transaction costs are:

The central hypothesis of the theory of the firm is that the firm chooses an organizational form that maximizes profits:

An input is specific, as opposed to generic if:

If our theory of the firm suggests that joint production is more efficient than individual production and that firms exist as a solution to the maximization problem, which of the following is inconsistent with that theory?

In the modern theory of the firm, an important difference between individuals and firms is that firms are:

Team production and specialization both share one important feature in common because both are potentially more productive, both may account for the existence of firms. However there are important differences; which of the following is among them?

Deferred compensation is an aspect of many employment contracts. For example, workers sometimes receive a bonus for staying with the firm for some specified period of time. In which of the following situations is deferred compensation likely to be a feature of the employment contract?