Deck 7: Firm Organization and Market Structure

Question 1

The board of a U.S. corporation usually includes

A)outside directors.
B)executives of competitors.
C)non-executive employees of the corporation.
D)All of the above.

Answer 1

outside directors.

Question 2

What is one of the biggest differences between a sole proprietorship and a corporation?

A)Sole proprietorships offer stock.
B)Corporation shareholders elect the managers of the firm.
C)Sole proprietorships have limited liability.
D)Corporations are the only profitable firms.

Answer 2

Corporation shareholders elect the managers of the firm.

Question 3

The board of a U.S. corporation usually includes

A)outside directors.
B)company executives.
C)former politicians.
D)All of the above.

Answer 3

All of the above.

Question 4

A mixed enterprise is one

A)where the government has significant ownership in a private company.
B)in which the company has more than one legal structure, such as limited liability and sole proprietorship.
C)that combines for-profit activities with education.
D)that has both for-profit and non-profit operations.

Question 5

If a firm traded on the New York Stock Exchange posts an accounting profit of $10 million, then the firm is making a positive economic profit

A)only if the Securities and Exchange Commission (SEC)approves the accounting report.
B)only if the firm's opportunity cost is less than $10 million.
C)only if the firm's opportunity benefit is more than $10 million.
D)only if the firm's management receives stock compensation.

Question 6

If a firm makes zero economic profit, then the firm

A)has total revenues greater than its economic costs.
B)must shut down.
C)can be earning positive accounting profit.
D)must have no fixed costs.

Question 7

A small business owner earns $50,000 in revenue annually. The explicit annual costs equal $30,000. The owner could work for someone else and earn $25,000 annually. The owner's business profit is ________ and the economic profit is ________.

A)$20,000, $20,000
B)$20,000, -$5,000
C)$25,000, -$5,000
D)$25,000, $20,000

Question 8

A firm sets its output where

A)marginal profit is zero.
B)marginal revenue is maximized.
C)marginal profit equals marginal revenue.
D)marginal profit is maximized.

Question 9

If a firm goes out of business because of negative economic profits, its books

A)might indicate a positive accounting profit.
B)might indicate that opportunity costs were zero.
C)might indicate that taxes are too high.
D)might suggest a mistaken value of explicit costs.

Question 10

U.S. corporations can

A)be publicly held and traded.
B)be closely held.
C)convert from publicly held to closely held.
D)All of the above.

Question 11

Economists typically assume that the owners of firms wish to

A)produce efficiently.
B)maximize sales revenues.
C)maximize profits.
D)All of the above.

Question 12

Which of the following generally does NOT seek to maximize profit?

A)Public sector companies
B)Corporations
C)Partnerships
D)Sole proprietorships

Question 13

An organization that converts inputs (like Labor, Capital etc.)into output can be a

A)firm.
B)sole proprietorship.
C)corporation.
D)All of the above.

Question 14

Limited liability is a benefit available only to

A)sole proprietorships.
B)partnerships.
C)corporations.
D)All of the above.

Question 15

A small business owner earns $75,000 in revenue annually. The explicit annual costs equal $40,000. The owner could work for someone else and earn $20,000 annually. The owner's accounting profit is ________ and owner's economic profit is ________.

A)$10,000, $10,000
B)$35,000, $10,000
C)$35,000, $55,000
D)$10,000, $55,000

Question 16

A ________ is a governance structure where owners are not personally liable.

A)sole proprietorship
B)partnership
C)mixed enterprise
D)corporation

Question 17

A firm's profit is

A)usually negative when opportunity costs are included.
B)the difference between marginal revenue and marginal cost.
C)the opportunity cost of the firm's shareholders.
D)the difference between revenue and cost.

Question 18

A firm sets its output where

A)marginal profit minus marginal cost equals zero (Mπ - MC = 0).
B)marginal revenue minus marginal profit equals zero (MR - Mπ = 0).
C)marginal revenue minus marginal cost equals zero (MR - MC = 0).
D)marginal revenue minus marginal cost is greater than zero (MR - MC > 0).

Question 19

Which entity produces the greatest proportion of U.S. gross domestic product?

A)government
B)non-profit organizations such as hospitals
C)firms
D)universities

Question 20

In which governance form do shareholders own the company?

A)Public sector
B)State-owned enterprise
C)Corporation
D)Non-profit

Question 21

The above figure shows the cost curves for a competitive firm. If the profit-maximizing level of output is 40, price is equal to

A)$0.
B)$15.
C)$10.
D)$11.

Question 22

If a competitive firm maximizes short-run profits by producing some quantity of output, which of the following must be TRUE at that level of output?

A)p = MC
B)MR = MC
C)p ≥ AVC
D)All of the above.

Question 23

The above figure shows the cost curves for a competitive firm. The firm will incur economic losses if the price is less than

A)$0.
B)$5.
C)$10.
D)$11.

Question 24

If marginal revenue equals marginal cost, the firm is maximizing profits as long as

A)the resulting profits are positive.
B)marginal cost exceeds marginal revenue for greater levels of output.
C)the average cost curve lies above the demand curve.
D)All of the above are required.

Question 25

If a competitive firm cannot earn a profit at any level of output during a given short-run period, then which of the following is FALSE?

A)It will shut down in the short run and wait until the price increases sufficiently.
B)It will exit the industry in the long run.
C)It will operate at a loss in the short run.
D)It will minimize its loss by decreasing output so that price exceeds marginal cost.

Question 26

By shutting down, a firm

A)stops receiving revenue but continues to pay variable costs.
B)stops receiving revenue and is stuck with its fixed costs.
C)avoids its sunk costs as well as its variable costs.
D)can avoid paying taxes on its previously earned profits.

Question 27

If a profit-maximizing firm finds that, at its current level of production, MR > MC, it will

A)earn greater profits than if MR = MC.
B)increase output.
C)decrease output.
D)shut down.

Question 28

If a competitive firm maximizes short-run profits by producing some quantity of output, which of the following must be TRUE at that level of output?

A)p > MC
B)MR > MC
C)p ≥ AVC
D)All of the above.

Question 29

The above figure shows the cost curves for a competitive firm. If the firm is to earn economic profit, price must exceed

A)$0.
B)$5.
C)$10.
D)$11.

Question 30

A firm bought a pizza oven for $13,500 and if it shut down now, could sell the oven for $9,500. Which of the following statements is TRUE?

A)The relevant cost of the oven when considering shutting down is $13,500.
B)The relevant cost of the oven when considering shutting down is $9,500.
C)The relevant cost of the oven when considering shutting down is $4,000.
D)The cost of the oven does not matter when deciding whether or not to shut down.

Question 31

A firm will shut down in the short run if

A)total fixed costs are too high.
B)total revenue from operating would not cover all costs.
C)total revenue from operating would not cover variable costs.
D)total revenue from operating would not cover fixed costs.

Question 32

The above figure shows the cost curves for a competitive firm. If the market price is $15 per unit, the firm will earn profits of

A)$0.
B)$4.
C)$40.
D)$160.

Question 33

If a profit-maximizing firm finds that, at its current level of production, MR < MC, it will

A)decrease output.
B)increase output.
C)shut down.
D)operate at a loss.

Question 34

A firm should always shut down if its revenue is

A)declining.
B)less than its average fixed costs.
C)less than its total costs.
D)less than its avoidable costs.

Question 35

In deciding whether to operate in the short run, the firm must consider the relationship between price and

A)total cost.
B)average variable cost.
C)total fixed cost.
D)the number of buyers.

Question 36

If a firm is operating at an output level where losses are minimized, the firm

A)has no incentive to stay in the industry.
B)is better of exiting the industry.
C)is maximizing profits.
D)will shut down.

Question 37

The above figure shows the cost curves for a competitive firm. The firm will shut down in the short run if price falls below

A)$5.
B)$10.
C)$11.
D)$15.

Question 38

If a short-run fixed cost is sunk, then

A)losses can be minimized by shutting down.
B)the firm should keep producing to cover the sunk cost.
C)the cost cannot be avoided by shutting down.
D)Both B and C.

Question 39

If a manager is unsure what the entire profit function looks like, then she can

A)decrease output slightly to see if profits increase.
B)increase output slightly to see if profits increase.
C)Both A and B.
D)None of the above.

Question 40

The above figure shows the cost curves for a competitive firm. If the firm is to operate in the short run, price must exceed

A)$0.
B)$5.
C)$10.
D)$11.

Question 41

A company that undertakes an activity so that it can "do well by doing good" is practicing

A)strategic corporate social responsibility.
B)altruistic corporate social responsibility.
C)profit sharing.
D)the survivor principle.

Question 42

Firm managers use poison pills to

A)make economics losses.
B)acquire controlling interest in another firm.
C)make the firm less attractive as a takeover target.
D)force faster turnover on the board of directors.

Question 43

The present value of a loan is the

A)amount of money the firm borrows today.
B)amount of money the firm must earn to pay off the loan.
C)future value plus interest.
D)compounded value of the interest payments.

Question 44

If interest rates are high,

A)money significantly in the future is worth very little today.
B)money significantly in the future is worth a lot today.
C)stock investors will not invest.
D)firms will have low profits.

Question 45

According to the survivor principle

A)firms will get taken over by their larger rivals over time.
B)only firms that maximize profits survive in highly competitive markets.
C)managers only work hard if they are threatened with their survival at the firm.
D)eventually all firms merge to become one large monopoly.

Question 46

If a firm sets marginal revenue equal to marginal cost it will make an economic profit.

Question 47

If the present value of all future revenue is positive, then

A)the firm should remain operating, even if it earns negative profit in the short run.
B)the firm should shut down if it is earning a negative profit in the short run.
C)the firm should shut down if it cannot cover its fixed costs in the short run.
D)Unable to determine with the information given.

Question 48

The future value of a loan is the

A)present value plus the interest rate.
B)amount of money the firm repay.
C)value of the profits the firm will earn from investing the loan.
D)compounded value of the interest payments.

Question 49

The present value and future value of a loan

A)have no relationship.
B)are connected through compounding.
C)represent the difference between income flows over time.
D)are connected through the interest rate.

Question 50

If a firm can borrow money at 0% interest, then

A)the lender is irrational.
B)its business investment is guaranteed to be profitable.
C)present value and future value are equal.
D)interest payments are deferred.

Question 51

If a firm doesn't make an economic profit, it will shut down.

Question 52

A firm's vertical dimension refers to

A)its ability to grow its profits.
B)the size of its headquarters building.
C)the degree to which it participates in the various stages of producing the products and services it sells.
D)the downstream stages of production.

Question 53

If the market price in a competitive market is below the minimum of average variable cost, the firm will shut down.

Question 54

Corporate Social Responsibility

A)is illegal in most countries.
B)minimizes conflict between owners and managers.
C)is the pursuit of social objectives by corporations.
D)disputes the stakeholder theory of R. Edward Freeman.

Question 55

Ronald McDonald Houses are an example of

A)altruistic corporate social responsibility.
B)reduction in shareholder value.
C)vertical integration.
D)strategic corporate social responsibility.

Question 56

The survival principle states that

A)firms must undertake social objectives to survive.
B)the only firms that survive are those that maximize profits.
C)the only firms that survive are those that maximize revenue.
D)managers who fail to maximize profits should be disciplined.

Question 57

If a firm cannot earn profits in the short run, it will shut down.

Question 58

Even though fixed costs do not affect the output decision, an increase in fixed costs results in a wider range of prices for which the firm operates at a loss.

Question 59

If the present value of all future profit is positive, then

A)the firm should remain operating, even if it earns negative profit in the short run.
B)the firm should shut down if it is earning a negative profit in the short run.
C)the firm should shut down if it cannot cover its fixed costs in the short run.
D)None of the above.

Question 60

Strategic ESG is intended to

A)increase profits while doing something good at the same time.
B)follow Milton Friedman's guidance on firm behavior.
C)be purely altruistic in nature.
D)avoid the legal and ethical obligations managers have to shareholders.

Question 61

Vertically integrated firms can use transfer pricing

A)to avoid government price controls.
B)as a way to compensate managers for transferring among departments in a vertically integrated firm.
C)to avoid paying market prices for inputs.
D)to shift profit.

Question 62

Vertical integration can

A)lower transaction costs due to lower costs of writing and enforcing contracts.
B)increase management costs and complexity.
C)reduce problems between owners and managers.
D)All of the above.

Question 63

A firm's horizontal dimension refers to

A)its size in its primary market.
B)its size in all markets in which is competes.
C)the level of supply chain integration the firm undertakes.
D)the number of stages in the production process that are upstream from the stages the firm undertakes.

Question 64

Firms might vertically disintegrate when

A)it becomes more profitable for a firm to specialize.
B)the IRS cracks down on transfer pricing.
C)the industry becomes too large to support itself.
D)the industry shrinks in size.

Question 65

Vertical restraints in a contract

A)are generally illegal in the U.S.
B)usually benefit the firm that produces the raw inputs to the production process.
C)are used in vertical mergers.
D)can approximate the outcome of a vertical merger.

Question 66

A McDonald's franchise is an example of

A)horizontal integration.
B)quasi-vertical integration.
C)a vertical merger.
D)None of the above.

Question 67

A firm that backward vertically integrates

A)moves downstream in the production process.
B)requires that the production process be relatively simple.
C)has to merge with another firm.
D)may be producing its own inputs.

Question 68

Market structure depends upon

A)the ease of entry and exit.
B)the ability of firms to differentiate their goods and services.
C)the number of firms in the market.
D)All of the above.

Question 69

Supply chain management refers to

A)the contracts put in place to manage a firm's suppliers.
B)the decisions around which stages of production to handle internally and which to buy from others.
C)how the firm compensates the employees who work on the firm's internal stages of production.
D)the 19th century practice of having barges move downstream with the flow of the river.

Question 70

Under perfect competition

A)information about prices is hard to obtain.
B)there is a maximum number of firms that can enter the market.
C)if a firm exits the market, price will rise.
D)transaction costs are low.

Question 71

All of the following are characteristics of an oligopolistic market EXCEPT

A)firms must consider the actions of their rivals.
B)cartels eventually form to keep prices high.
C)firms have the ability to influence prices.
D)firms earn lower profits than a monopoly.

Question 72

Disruptive innovations

A)are created exclusively by start-up companies.
B)can create new industries or destroy old ones.
C)create oligopolies.
D)are always based on sophisticated advances in technology.

Question 73

Opportunistic behavior may occur when

A)a firm buys its inputs from multiple suppliers.
B)firms incur significant transaction costs when negotiating contracts.
C)a firm backwards vertically integrates.
D)a firm can buy a key component from only one supplier.

Question 74

An oligopoly

A)requires government licensing.
B)has relatively few firms, but they are still price takers.
C)always collude to keep prices high.
D)has barriers to entry.

Question 75

According to economists, competitive firms

A)compete for the same customers.
B)are price takers.
C)differentiate their products.
D)are able to change output and affect the market price.

Question 76

Toyota's just-in-time system is an example of

A)backward (upstream)integration.
B)quasi-vertical integration.
C)using transfer pricing to avoid price controls.
D)horizontal, downstream integration.

Question 77

A firm that is vertically integrated

A)participates in more than one successive stage of production.
B)has higher profits than firms that are not vertically integrated.
C)produces all of its own inputs.
D)relies on other firms to market its products.

Question 78

In a monopolistically competitive market

A)firms are price setters.
B)barriers to entry are high.
C)firms earn positive economic profit in the long run.
D)products are undifferentiated.

Question 79

Vertical integration

A)is always driven by profitability concerns.
B)results in lower transaction costs.
C)may be undertaken to avoid government regulations.
D)hampers timely delivery of inputs into the production process.

Question 80

A monopoly

A)must have a patent to protect its products.
B)is a price taker.
C)produces the market output.
D)doesn't lose any sales when it raises its price.