Deck 1: Managers,profits,and Markets

Question 1

Which of the following is NOT one of features characterizing market structures?

A)the number and size of firms
B)the likelihood of new firm's entering a market
C)the level of capital investment in research and development
D)the degree of product differentiation

Answer 1

C

Question 2

A price-setting firm

A)can lower the price of its product and sell more units.
B)can raise the price of its product and sell the same number of units.
C)possesses little market power.
D)sells a product that is not differentiated from the product sold by its rivals or sells in a limited geographic market area with only one or a few sellers.

Answer 2

A

Question 3

value of a firm is

A)smaller the higher is the risk premium used to compute the firm's value.
B)larger the higher is the risk premium used to compute the firm's value.
C)the price for which the firm can be sold minus the present value of the expected future profits.
D)both b and c

Answer 3

A

Question 4

Owners of a firm want the managers to make business decisions which will

A)maximize the value of the firm.
B)maximize expected profit in each period of operation.
C)maximize the market share of the firm.
D)both a and b are correct when revenue and cost conditions in one time period are independent of revenues and costs in future time periods.

Question 5

risk premium is

A)a measure calculated to reflect the riskiness of future profits.
B)subtracted from the discount rate when calculating the present value of a future stream of profits.
C)lower the riskier the future stream of profits.
D)an additional compensation paid to the workers of a business enterprise.

Question 6

Suppose Marv,the owner-manager of Marv's Hot Dogs,earned $82,000 in revenue last year.Marv's explicit costs of operation totaled $36,000.Marv has a Bachelor of Science degree in mechanical engineering and could be earning $40,000 annually as mechanical engineer.

A)Marv's implicit cost of using owner-supplied resources is $36,000.
B)Marv's economic profit is $36,000.
C)Marv's implicit cost of using owner-supplied resources is $30,000.
D)Marv's economic profit is $6,000.

Question 7

Economic profit is the difference between

A)total revenue and the opportunity cost of all of the resources used in production.
B)total revenue and the implicit costs of using owner-supplied resources.
C)accounting profit and the opportunity cost of the market-supplied resources used by the firm.
D)accounting profit and explicit costs.

Question 8

Consider a firm that employs some resources that are owned by the firm.When accounting profit is zero,economic profit

A)must also equal zero.
B)is sure to be positive.
C)must be negative and shareholder wealth is reduced.
D)cannot be computed accurately,but the firm is breaking even nonetheless.

Question 9

Which of the following is NOT a characteristic of monopoly market structures?

A)A single firm produces the entire market output.
B)The easier consumers can find imperfect substitutes for the firm's product the lower will be the firm's market power.
C)There are no barriers to entry.
D)No close substitutes for the product are available.

Question 10

economic profit is positive,

A)total revenue exceeds total economic cost.
B)the firm's owners have successfully solved the principle-agent problem.
C)the firm's owners experience a decrease in their wealth.
D)foreign companies experience loss of market share

Question 11

A market

A)raises the transaction costs of doing business.
B)is any arrangement that brings buyers and sellers together to exchange goods or services.
C)is an institution used rarely by capitalist nations.
D)is characterized by rigid prices

Question 12

When a firm is a price-taking firm,

A)the price of the product it sells is determined by the intersection of the market demand and supply curves for the product.
B)raising the price of the product above the market-determined price will cause sales to fall nearly to zero.
C)many other firms produce a product that is identical to the output produced by the rest of the firms in the industry.
D)all of the above

Question 13

In a perfectly competitive market,

A)all firms produce and sell a standardized or undifferentiated product.
B)the output sold by a particular firm may be quite different from the output sold by the other firms in the market.
C)firms are price-setters.
D)it is difficult for new firms to enter the market due to barriers to entry.

Question 14

Economic theory is a valuable tool for business decision making because it

A)identifies for managers the essential information for making a decision.
B)assumes away the problem.
C)creates a realistic,complex model of the business firm.
D)provides an easy solution to complex business problems.

Question 15

Which of the following statements is true?

A)Shareholders as a group have little or no ability to force managers to pursue maximization of the firm's value.
B)The effectiveness of a board of directors in monitoring managers is enhanced by appointing members from the firm who are well-informed about the management problems facing the firm.
C)Reducing the amount of debt financing can reduce divergence between the shareholders' interests and the manager's interests.
D)Equity ownership by managers is thought to be one of the most effective corporate control mechanisms.
E)All of the above are true.

Question 16

A price-taking firm can exert no control over price because

A)the firm's demand curve is downward sloping.
B)of a lack of substitutes for the product.
C)the firm's individual production is insignificant relative to total production in the industry.
D)no other firms make a product that is nearly identical to its product.

Question 17

Which of the following statements is false?

A)Explicit costs of using market-supplied resources entail an opportunity cost equal to the dollar cost of obtaining the resources in the market.
B)When economic profit is zero,the firm's owners could not have done better putting their resources in some other industry of comparable risk.
C)If economic profit is positive,accounting profit must also be positive.
D)If economic profit is negative,accounting profit must also be negative.
E)None of the above statements is false.

Question 18

The principal-agent problem arises when

A)the principal and the agent have different objectives.
B)the principal cannot enforce the contract with the agent or finds it too costly to monitor the agent.
C)the principal cannot decide whether the firm should seek to maximize the expected future profits of the firm or maximize the price for which the firm can be sold.
D)both a and b

Question 19

Moral hazard

A)occurs when managers pursue profit maximization without regard to the interests of society in general.
B)exists when either party to a contract has an incentive to cancel the contract.
C)occurs only rarely in modern corporations.
D)is the cause of principal-agent problems.

Question 20

Economic profit

A)is a theoretical measure of a firm's performance and has little value in real world decision making.
B)can be calculated by subtracting implicit costs of using owner-supplied resources from the firm's total revenue.
C)is negative when total costs exceed total revenues.
D)is generally larger than accounting profit.

Question 21

St.Charles Hospital,located in an upper-income neighborhood of a large city,recently received a restored mansion as a gift from an appreciative patient.The board of directors decided to remodel the mansion and use it as recuperative quarters for patients willing to pay for luxurious accommodations.The cost to the hospital of using the mansion includes

A)nothing because it was a gift.
B)how much the hospital pays for upkeep--taxes,insurance,utilities,maintenance,etc.
C)how much the hospital would receive if it rented or sold the mansion.
D)the legal expenses to transfer ownership to St.Charles Hospital.
E)both b and c

Question 22

Answer the next questions using the following annual income statement for Quest Realty, Inc.:

$\begin{array}{c}\begin{array}{lll} \text { Revenues}\\ \text { Revenue from sales of goods and services}\\ \text { Operating costs and expenses:}\\ \text { Cost of products and services sold}\\ \text { Selling expenses}\\ \text { Administrative expense}\\ \text { Total operating costs and expenses}\\ \text { Income from operations}\\ \text { Interest expense (corporate bonds \& loans)}\\ \text { Non-recurring expense (Legal expenses/fines in}\\ \text { settling a federal antitrust suit)}\\ \text { Income taxes.}\\ \text { Net income}\\ \end{array}\begin{array}{r}\\\$ 80,000,000 \\\\\$ 30,000,000 \\\$ 3,000,000 \\\underline{\$ 4,000,000 }\\ \underline{\$ 37,000,000 }\\ \$ 43,000,000 \\\$ 300,000 \\\\\$ 200,000 \\\underline{\$ 700,000} \\\underline{\underline{ \$ 41,800,000}} \\ \end{array}\end{array}$
During this year of operation, Quest Realty owned and occupied an office building in downtown Indianapolis. For this year, the building could have been leased to other businesses for $2,000,000 in lease income. Quest Realty also owned undeveloped land valued at $15,000,000. Owners of Quest Realty can earn a 14% rate of return annually on funds invested elsewhere.

-Quest's accounting profit is

A) -$4,100,000
B)$9,360,000
C)$38,200,000
D)$42,300,000
E)none of the above

Question 23

Which of the following economic forces promotes profitability in the long run?

A)Existence of strong barriers to entry.
B)A large number of complementary products
C)A large number of close substitute products.
D)Both a and b
E)All of the above

Question 24

Answer the next questions using the following annual income statement for Quest Realty, Inc.:

$\begin{array}{c}\begin{array}{lll} \text { Revenues}\\ \text { Revenue from sales of goods and services}\\ \text { Operating costs and expenses:}\\ \text { Cost of products and services sold}\\ \text { Selling expenses}\\ \text { Administrative expense}\\ \text { Total operating costs and expenses}\\ \text { Income from operations}\\ \text { Interest expense (corporate bonds \& loans)}\\ \text { Non-recurring expense (Legal expenses/fines in}\\ \text { settling a federal antitrust suit)}\\ \text { Income taxes.}\\ \text { Net income}\\ \end{array}\begin{array}{r}\\\$ 80,000,000 \\\\\$ 30,000,000 \\\$ 3,000,000 \\\underline{\$ 4,000,000 }\\ \underline{\$ 37,000,000 }\\ \$ 43,000,000 \\\$ 300,000 \\\\\$ 200,000 \\\underline{\$ 700,000} \\\underline{\underline{ \$ 41,800,000}} \\ \end{array}\end{array}$
During this year of operation, Quest Realty owned and occupied an office building in downtown Indianapolis. For this year, the building could have been leased to other businesses for $2,000,000 in lease income. Quest Realty also owned undeveloped land valued at $15,000,000. Owners of Quest Realty can earn a 14% rate of return annually on funds invested elsewhere.

-Total explicit costs of using market-supplied resources for Quest Realty for this year are

A)$23,000,000
B)$37,000,000
C)$38,200,000
D)$41,100,000
E)none of the above

Question 25

Which of the following is a common mistake that managers make?

A)Using marginal analysis to make output decisions.
B)Maximizing the value of the firm instead of maximizing the firm's profits.
C)Reducing price to increase the firm's share of total market sales.
D)Treating implicit opportunity costs as part of the total costs of using resources.
E)all of the above.

Question 26

When economic profit is zero,

A)there is just enough revenue left after paying all explicit costs to cover the cost of using the firm's owner-supplied resources.
B)accounting profit is positive.
C)accounting profit is exactly equal to the implicit cost of using the firm's owner-supplied resources.
D)all of the above
E)none of the above

Question 27

In markets characterized by monopolistic competition,

A)a small number of relatively small firms sell a differentiated product.
B)a small number of relatively large firms sell a standardized product.
C)entry into the market is relatively easy so that profit in the long run is zero.
D)entry into the market is restricted so that profit may be positive in the long run.

Question 28

Which of the following is NOT one of the economic forces that promotes long-run profitability of business firms?

A)Low market power of input suppliers.
B)Low market power of consumers.
C)Strong barriers to entry of rival firms.
D)Fierce rivalry among the firms competing in the industry.
E)Abundance of complementary products

Question 29

A manager who does not see his or her goal as the maximization of profit

A)may nevertheless maximize the value of the firm.
B)may create a principle-agent problem.
C)will follow objectives that conflict with those of the owners of the firm.
D)both b and c

Question 30

Over the past 25 years,which of the following developments encouraged globalization of markets?

A)Eleven European countries began using the "euro" as a common currency.
B)The ability to buy and sell goods on the Internet was increased.
C)Numerous bilateral and multilateral trade agreements were reached.
D)both a and c
E)all of the above

Question 31

Answer the next questions using the following annual income statement for Quest Realty, Inc.:

$\begin{array}{c}\begin{array}{lll} \text { Revenues}\\ \text { Revenue from sales of goods and services}\\ \text { Operating costs and expenses:}\\ \text { Cost of products and services sold}\\ \text { Selling expenses}\\ \text { Administrative expense}\\ \text { Total operating costs and expenses}\\ \text { Income from operations}\\ \text { Interest expense (corporate bonds \& loans)}\\ \text { Non-recurring expense (Legal expenses/fines in}\\ \text { settling a federal antitrust suit)}\\ \text { Income taxes.}\\ \text { Net income}\\ \end{array}\begin{array}{r}\\\$ 80,000,000 \\\\\$ 30,000,000 \\\$ 3,000,000 \\\underline{\$ 4,000,000 }\\ \underline{\$ 37,000,000 }\\ \$ 43,000,000 \\\$ 300,000 \\\\\$ 200,000 \\\underline{\$ 700,000} \\\underline{\underline{ \$ 41,800,000}} \\ \end{array}\end{array}$
During this year of operation, Quest Realty owned and occupied an office building in downtown Indianapolis. For this year, the building could have been leased to other businesses for $2,000,000 in lease income. Quest Realty also owned undeveloped land valued at $15,000,000. Owners of Quest Realty can earn a 14% rate of return annually on funds invested elsewhere.

-Total implicit costs of using owner-supplied resources for Quest Realty for this year are

A)$4,100,000
B)$19,000,000
C)$38,200,000
D)$41,000,000
E)none of the above

Question 32

At the beginning of 2020,market analysts expect Atlantis Company,holder of a valuable patent,to earn the following stream of economic profits over the next five years.At the end of five years,Atlantis will lose its patent protection,and analysts expect economic profit to be zero after five years. $$\begin{array}{l}\text { Axpected Aconomic }\\\begin{array} { l l l } \text { Yaar } & \text { Frofit } \\\hline 2020 & \$ 225,000 \\2021 & \$ 325,000 \\2022 & \$ 425,000 \\2023 & \$ 200,000 \\2024 & \$ 100,000\end{array}\end{array}$$ If investors apply an annual risk-adjusted discount rate of 15%,the value of Atlantis Company in 2020 is $______________________,which is also the maximum price investors would be willing to pay for Atlantis Company.

A)$726,916
B)$884,912
C)$1,275,000
D)$2,215,000
E)$3,824,318

Question 33

Which of the following is a common mistake that managers make?

A)Using marginal analysis to make output decisions.
B)Maximizing the value of the firm instead of maximizing the firm's profits.
C)Treating implicit opportunity costs as part of the total costs of using resources.
D)Increasing the rate of production in order to reduce unit costs of production.
E)all of the above.

Question 34

Economic profit is a better measure of a firm's performance than accounting profit because

A)accounting profit is unreliable because generally accepted accounting practices (GAAP)overstates the firm's true costs of using resources.
B)economic profit fully accounts for all sources of revenue.
C)as a general rule,only explicit costs can be subtracted from revenue for the purposes of computing taxable profit.
D)the opportunity cost of using ALL resources is subtracted from total revenue.
E)both c and d

Question 35

In markets characterized by oligopoly,

A)a large number of relatively large firms sell a differentiated product.
B)a small number of relatively small firms sell a standardized product.
C)mutual interdependence of firms means that actions of any one firm in the market will have no effect on the sales of all other firms in the market.
D)entry into the market is restricted so that profit may be positive in the long run.

Question 36

Until recently you worked as an accountant earning $60,000 annually.Then you inherited a piece of commercial real estate bringing in $40,000 rent annually.You decided to leave your job and open a tattoo parlor in the office space you inherited. At the end of the first year,your books showed total revenues of $180,000 and total explicit costs of $90,000 for labor,ink,utilities,taxes,and miscellaneous supplies.Your total cost of doing business during the first year is ______________ and you earned economic profit of ______________.

A)$190,000; -$10,000
B)$90,000; $90,000
C)$130,000; $50,000
D)$150,000; $30,000

Question 37

Answer the next questions using the following annual income statement for Quest Realty, Inc.:

$\begin{array}{c}\begin{array}{lll} \text { Revenues}\\ \text { Revenue from sales of goods and services}\\ \text { Operating costs and expenses:}\\ \text { Cost of products and services sold}\\ \text { Selling expenses}\\ \text { Administrative expense}\\ \text { Total operating costs and expenses}\\ \text { Income from operations}\\ \text { Interest expense (corporate bonds \& loans)}\\ \text { Non-recurring expense (Legal expenses/fines in}\\ \text { settling a federal antitrust suit)}\\ \text { Income taxes.}\\ \text { Net income}\\ \end{array}\begin{array}{r}\\\$ 80,000,000 \\\\\$ 30,000,000 \\\$ 3,000,000 \\\underline{\$ 4,000,000 }\\ \underline{\$ 37,000,000 }\\ \$ 43,000,000 \\\$ 300,000 \\\\\$ 200,000 \\\underline{\$ 700,000} \\\underline{\underline{ \$ 41,800,000}} \\ \end{array}\end{array}$
During this year of operation, Quest Realty owned and occupied an office building in downtown Indianapolis. For this year, the building could have been leased to other businesses for $2,000,000 in lease income. Quest Realty also owned undeveloped land valued at $15,000,000. Owners of Quest Realty can earn a 14% rate of return annually on funds invested elsewhere.

-Quest's economic profit is

A)$19,000,000
B)$21,800,000
C)$38,200,000
D)$41,000,000
E)none of the above

Question 38

Answer the next questions using the following annual income statement for Quest Realty, Inc.:

$\begin{array}{c}\begin{array}{lll} \text { Revenues}\\ \text { Revenue from sales of goods and services}\\ \text { Operating costs and expenses:}\\ \text { Cost of products and services sold}\\ \text { Selling expenses}\\ \text { Administrative expense}\\ \text { Total operating costs and expenses}\\ \text { Income from operations}\\ \text { Interest expense (corporate bonds \& loans)}\\ \text { Non-recurring expense (Legal expenses/fines in}\\ \text { settling a federal antitrust suit)}\\ \text { Income taxes.}\\ \text { Net income}\\ \end{array}\begin{array}{r}\\\$ 80,000,000 \\\\\$ 30,000,000 \\\$ 3,000,000 \\\underline{\$ 4,000,000 }\\ \underline{\$ 37,000,000 }\\ \$ 43,000,000 \\\$ 300,000 \\\\\$ 200,000 \\\underline{\$ 700,000} \\\underline{\underline{ \$ 41,800,000}} \\ \end{array}\end{array}$
During this year of operation, Quest Realty owned and occupied an office building in downtown Indianapolis. For this year, the building could have been leased to other businesses for $2,000,000 in lease income. Quest Realty also owned undeveloped land valued at $15,000,000. Owners of Quest Realty can earn a 14% rate of return annually on funds invested elsewhere.

-Quest's total economic cost is

A)$17,000,000
B)$38,200,000
C)$41,000,000
D)$42,300,000

Question 39

Firms with market power may try to limit entry of rival firms in the long run by setting the price of their product below the level that maximizes profit.This kind of pricing behavior

A)is OK in theory but would not be commonly practiced in the real world because no manager will ever price either above or below the profit-maximizing level.
B)is a business practice or tactic because pricing decisions are routine decisions made by managers every day.
C)should always be implemented in order maximize the firm's market share in both the short run and long run periods.
D)is a strategic pricing decision because the manager is making the pricing decision with the goal of altering the behavior of rival firms to protect its profit in the long run.

Question 40

Which of the following is an example of an implicit cost for a firm?

A)the value of time worked by the owner.
B)any wages and salaries paid to employed.
C)forgone rent on property owned by firm.
D)both a and c
E)all of the above

Question 41

Which of the following conditions must hold in order to have a principal-agent problem?

A)Managers and owners have different objectives for the firm.
B)It is very costly to oversee every managerial decision to make sure all decisions increase the value of the firm.
C)Complete contracts effectively restrain managers from making value-reducing decisions.
D)The objectives of managers and owners are aligned but hidden actions by managers cannot be observed no matter how much is spent on monitoring managers.
E)both a and b

Question 42

Knight's explicit costs for the year are $______________,its implicit costs are $______________,and thus Knight's total economic cost is $______________.

A)$3,500,000; $1,000,000; $4,500,000
B)$3,500,000; $120,000; $3,620,000
C)$4,500,000; $1,000,000; $5,500,000
D)$5,000,000; $1,000,000; $6,000,000

Question 43

Answer the next questions using the following annual income statement for Bonus Realty, Inc.:

$\begin{array}{c}\begin{array}{lll} \text { Revenues}\\ \text { Revenue from sales of goods and services}\\ \text { Operating costs and expenses:}\\ \text { Cost of products and services sold}\\ \text { Selling expenses}\\ \text { Administrative expense}\\ \text { Total operating costs and expenses}\\ \text { Income from operations}\\ \text { Interest expense (corporate bonds \& loans)}\\ \text { Non-recurring expense (Legal expenses/fines in}\\ \text { settling a federal antitrust suit)}\\ \text { Income taxes.}\\ \text { Net income}\\ \end{array}\begin{array}{r}\\\$ 100,000,000 \\\\\$ 30,000,000 \\\$ 3,000,000 \\\underline{\$ 4,000,000} \\\underline{ \$ 37,000,000} \\\$ 63,000,000 \\\$ 500,000 \\\\\$ 100,000 \\\underline{\$ 740,000} \\\underline{\underline{\$ 61,660,000 }}\\ \end{array}\end{array}$

During this year of operation, Bonus Realty owned and occupied an office building in downtown Cleveland. For this year, the building could have been leased to other businesses for $3,000,000 in lease income. Bonus Realty also owned undeveloped land valued at $10,000,000. Owners of Bonus Realty can earn a 4% rate of return annually on funds invested elsewhere.

-Economic profit for Bonus Realty is

A)$19,000,000
B)$21,800,000
C)$38,200,000
D)$41,000,000
E)none of the above

Question 44

Economic theory is a valuable tool for business decision making because it

A)acts like a road map to abstract away from nonessential matters to allow managers to concentrate on the relevant items for making a decision.
B)creates a realistic,complex model of the business decision.
C)allows managers to apply the economic way of thinking to make valid explanations and predictions about real world business problems.
D)both a and c
E)a,b and c

Question 45

The economic cost to the owners of a firm for using productive resources

A)is measured fully by the explicit or out-of-pocket expenses incurred when the firm uses resources it purchases in the market.
B)does not include implicit costs associated with resources the firm already owns.
C)is the total opportunity cost of all resources used by the firm.
D)is measured by the sum of the explicit costs of market supplied resources plus the implicit costs of owner-supplied resources.
E)both c and d

Question 46

Answer the next questions using the following annual income statement for Bonus Realty, Inc.:

$\begin{array}{c}\begin{array}{lll} \text { Revenues}\\ \text { Revenue from sales of goods and services}\\ \text { Operating costs and expenses:}\\ \text { Cost of products and services sold}\\ \text { Selling expenses}\\ \text { Administrative expense}\\ \text { Total operating costs and expenses}\\ \text { Income from operations}\\ \text { Interest expense (corporate bonds \& loans)}\\ \text { Non-recurring expense (Legal expenses/fines in}\\ \text { settling a federal antitrust suit)}\\ \text { Income taxes.}\\ \text { Net income}\\ \end{array}\begin{array}{r}\\\$ 100,000,000 \\\\\$ 30,000,000 \\\$ 3,000,000 \\\underline{\$ 4,000,000} \\\underline{ \$ 37,000,000} \\\$ 63,000,000 \\\$ 500,000 \\\\\$ 100,000 \\\underline{\$ 740,000} \\\underline{\underline{\$ 61,660,000 }}\\ \end{array}\end{array}$

During this year of operation, Bonus Realty owned and occupied an office building in downtown Cleveland. For this year, the building could have been leased to other businesses for $3,000,000 in lease income. Bonus Realty also owned undeveloped land valued at $10,000,000. Owners of Bonus Realty can earn a 4% rate of return annually on funds invested elsewhere.

-Total economic cost is

A)$17,000,000
B)$38,200,000
C)$41,740,000
D)$42,300,000

Question 47

Answer the next questions using the following annual income statement for Bonus Realty, Inc.:

$\begin{array}{c}\begin{array}{lll} \text { Revenues}\\ \text { Revenue from sales of goods and services}\\ \text { Operating costs and expenses:}\\ \text { Cost of products and services sold}\\ \text { Selling expenses}\\ \text { Administrative expense}\\ \text { Total operating costs and expenses}\\ \text { Income from operations}\\ \text { Interest expense (corporate bonds \& loans)}\\ \text { Non-recurring expense (Legal expenses/fines in}\\ \text { settling a federal antitrust suit)}\\ \text { Income taxes.}\\ \text { Net income}\\ \end{array}\begin{array}{r}\\\$ 100,000,000 \\\\\$ 30,000,000 \\\$ 3,000,000 \\\underline{\$ 4,000,000} \\\underline{ \$ 37,000,000} \\\$ 63,000,000 \\\$ 500,000 \\\\\$ 100,000 \\\underline{\$ 740,000} \\\underline{\underline{\$ 61,660,000 }}\\ \end{array}\end{array}$

During this year of operation, Bonus Realty owned and occupied an office building in downtown Cleveland. For this year, the building could have been leased to other businesses for $3,000,000 in lease income. Bonus Realty also owned undeveloped land valued at $10,000,000. Owners of Bonus Realty can earn a 4% rate of return annually on funds invested elsewhere.

-Total implicit costs of using owner-supplied resources for Bonus Realty for this year are

A)$3,400,000
B)$13,000,000
C)$14,000,000
D)$37,000,000
E)none of the above

Question 48

Moral hazard is a principal-agent problem that arises when

A)Managers' and owners' objectives are nonaligned.
B)Complete contracts effectively restrain managers from making value-reducing decisions.
C)Managers can take hidden actions.
D)both a and c
E)all of the above

Question 49

What is the most important characteristic of oligopoly?

A)firms have market power
B)product differentiation
C)barriers to entry
D)interdependence of profits

Question 50

Answer the next questions using the following annual income statement for Bonus Realty, Inc.:

$\begin{array}{c}\begin{array}{lll} \text { Revenues}\\ \text { Revenue from sales of goods and services}\\ \text { Operating costs and expenses:}\\ \text { Cost of products and services sold}\\ \text { Selling expenses}\\ \text { Administrative expense}\\ \text { Total operating costs and expenses}\\ \text { Income from operations}\\ \text { Interest expense (corporate bonds \& loans)}\\ \text { Non-recurring expense (Legal expenses/fines in}\\ \text { settling a federal antitrust suit)}\\ \text { Income taxes.}\\ \text { Net income}\\ \end{array}\begin{array}{r}\\\$ 100,000,000 \\\\\$ 30,000,000 \\\$ 3,000,000 \\\underline{\$ 4,000,000} \\\underline{ \$ 37,000,000} \\\$ 63,000,000 \\\$ 500,000 \\\\\$ 100,000 \\\underline{\$ 740,000} \\\underline{\underline{\$ 61,660,000 }}\\ \end{array}\end{array}$

During this year of operation, Bonus Realty owned and occupied an office building in downtown Cleveland. For this year, the building could have been leased to other businesses for $3,000,000 in lease income. Bonus Realty also owned undeveloped land valued at $10,000,000. Owners of Bonus Realty can earn a 4% rate of return annually on funds invested elsewhere.

-Bonus Realty's accounting profit is

A)-$4,100,000
B)$9,360,000
C)$38,200,000
D)$41,740,000
E)none of the above

Question 51

Answer the next questions using the following annual income statement for Bonus Realty, Inc.:

$\begin{array}{c}\begin{array}{lll} \text { Revenues}\\ \text { Revenue from sales of goods and services}\\ \text { Operating costs and expenses:}\\ \text { Cost of products and services sold}\\ \text { Selling expenses}\\ \text { Administrative expense}\\ \text { Total operating costs and expenses}\\ \text { Income from operations}\\ \text { Interest expense (corporate bonds \& loans)}\\ \text { Non-recurring expense (Legal expenses/fines in}\\ \text { settling a federal antitrust suit)}\\ \text { Income taxes.}\\ \text { Net income}\\ \end{array}\begin{array}{r}\\\$ 100,000,000 \\\\\$ 30,000,000 \\\$ 3,000,000 \\\underline{\$ 4,000,000} \\\underline{ \$ 37,000,000} \\\$ 63,000,000 \\\$ 500,000 \\\\\$ 100,000 \\\underline{\$ 740,000} \\\underline{\underline{\$ 61,660,000 }}\\ \end{array}\end{array}$

During this year of operation, Bonus Realty owned and occupied an office building in downtown Cleveland. For this year, the building could have been leased to other businesses for $3,000,000 in lease income. Bonus Realty also owned undeveloped land valued at $10,000,000. Owners of Bonus Realty can earn a 4% rate of return annually on funds invested elsewhere.

-Total explicit costs of using market-supplied resources for Bonus Realty for this year are

A)$23,000,000
B)$37,000,000
C)$36,200,000
D)$38,340,000
E)$41,000,000

Question 52

Corporate control mechanisms

A)can make it easier to detect hidden actions by managers.
B)will exacerbate moral hazard problems when complete contracts are effectively solving the principal-agent problem.
C)may not be important when corporate takeovers effectively impose external forces to ensure managerial decisions are value-maximizing.
D)make it impossible for managers to take hidden actions that are harmful to the interests of the firm's owners.
E)both a and b

Question 53

Knight's Electric earns accounting profit of $______________ and its economic profit is $______________.

A)$1,500,000; $1,000,000
B)$3,500,000; $120,000
C)$4,500,000; $1,000,000
D)$1,500,000; $1,380,000
E)none of the above

Question 54

Which of the following statements is false?

A)Explicit costs of using market-supplied resources entail an opportunity cost equal to the dollar cost of obtaining the resources in the market.
B)When economic profit is zero,the firm's owners could NOT have done better putting their resources in some other industry of comparable risk.
C)If economic profit is positive,accounting profit must also be positive.
D)If economic profit is negative,accounting profit must also be negative.
E)None of the above statements is false.