Deck 3: Business Organisations

Question 1

When economists talk about business organisations they are referring to

A) public corporations.
B) private sector firms.
C) co- operatives.
D) all of the above

Answer 1

all of the above

Question 2

Transaction costs are

A) the costs of making economic arrangements for production, distribution and sales.
B) taxes on sales revenues that firms are required to pay to the government.
C) commission charges paid to sales representatives.
D) none of the above

Answer 2

the costs of making economic arrangements for production, distribution and sales.

Question 3

Transaction costs are caused by

A) the need to monitor contracts.
B) the complexity of contracts.
C) imperfect knowledge.
D) all of the above

Answer 3

all of the above

Question 4

The existence of transaction costs on an activity means that

A) it will always be cost- effective to organise this activity within the firm.
B) banks are financially viable.
C) it may be preferable to organise the activity within the firm.
D) external contracts are a bad way of organising this business activity.

Question 5

The traditional theory of the firm assumes that firms aim to

A) maximise profits.
B) maximise sales revenue.
C) maximise utility.
D) minimise costs.

Question 6

If we employ someone to carry out our wishes, the resulting conflict of interest is known by economists as the

A) separation of ownership and control.
B) conflict of interest.
C) fallacy of composition.
D) principal- agent problem.

Question 7

The principal- agent problem arises because of

A) scarcity.
B) countervailing power
C) moral hazard.
D) asymmetric information.

Question 8

A divorce of ownership from control creates problems such as

A) there are no problems as this gives the owner time to do other things.
B) conflicts between the objectives of managers and owners.
C) tax revenues may be lower.
D) managers may be better at running the business than the owner, thus removing the owner from the decision- making process.

Question 9

The divorce of ownership and control tends to occur in

A) partnerships.
B) co- operatives.
C) monopolies.
D) sole proprietors.
E) public limited companies.

Question 10

The divorce of ownership and control causes a problem usually referred to by economists as

A) adverse selection.
B) profit myopia.
C) moral hazard.
D) principal- agent problem.
E) merger mania.

Question 11

Which of the following statements is false?

A) Firms that are too cautious are unlikely to be forced out of an industry.
B) Trying to maximise any objective is a risky strategy.
C) In order to survive, firms should balance caution against keeping up with competitors.
D) Firms may become cautious if they are too concerned with survival.

Question 12

Which of the following decisions would you associate with a very cautious firm?

A) Fast expansion
B) A quick decision- making process
C) Diversifying into new markets
D) Using tried and tested approaches

Question 13

If a business is owned by _________it is called a _________.

A) two or more people; public corporation
B) customers; partnership
C) one person; co- operative
D) shareholders; public limited company

Question 14

If a business is owned by _________it is called a_________.

A) customers; public limited company
B) shareholders; public corporation
C) two or more people; partnership
D) one person; co- operative

Question 15

If a business is owned by_________it is called a_________.

A) the state; public limited company
B) shareholders; public corporation
C) one person; sole proprietor
D) customers; partnership

Question 16

If a business is owned by_________it is called a _________

A) customers; sole proprietor
B) the state; public corporation
C) shareholders; co- operative
D) one person; partnership

Question 17

If a business is owned by_________it is called a_________.

A) shareholders; public corporation
B) the state; public limited company
C) customers; co- operative
D) one person; partnership

Question 18

Which of the following is not an advantage of being a sole trader?

A) Easy to establish
B) Unlimited liability - losses borne by owner
C) Independence
D) You receive all of the profit

Question 19

Which of the following are advantages of being a partnership as opposed to being a sole trader?

A) Specialists, such as accountants can be brought in
B) Injection of extra capital
C) The partners are liable for the debts of the firm
D) Shared responsibility
E) All of the above F) None of the above

Question 20

Which of the following is often an advantage for a sole proprietor?

A) Good scope for rapid expansion
B) Unlimited liability
C) Can adapt relatively rapidly to market conditions
D) Limited liability

Question 21

An 'M- form' firm has_________and a 'U- form' firm has_________.

A) a major principal- agent problem; no principal- agent problem
B) unitary structure; managerial structure
C) strong shareholders; weak shareholders
D) managerial structure; unitary structure

Question 22

Managers may not want to maximise profits because

A) they may prefer to raise their salary at the expense of profits.
B) it may involve high risk decisions which could fail and bankrupt the company.
C) they are more interested in meeting society's needs
D) A and B

Question 23

According to R. Coase, the key advantage of organising production and distribution through firms rather than markets is that

A) goods purchased in a free market are often sold at very high prices.
B) markets are subject to possible dishonesty.
C) it can involve lower transaction costs.
D) it allows the firm to grow.

Question 24

If a business holds controlling interests in a number of other companies or subsidiaries, economists call this

A) a transnational association.
B) a holding company.
C) an integrated enterprise.
D) global outsourcing.

Question 25

The integrated international enterprise is an organisational structure where

A) the business headquarters holds little equity investment in its subsidiaries.
B) the managing director makes independent decisions for all the subsidiaries of the company.
C) rather than pursuing independent business strategies, a company's international subsidiaries co- ordinate and integrate their activities in pursuit of shared corporate aims and objectives.
D) middle layers of management are cut out.

Question 26

Transaction costs are the main reason for organising production within firms rather than using the market.

Question 27

Asymmetric information is said to be the main cause of the principal- agent problem.

Question 28

Asymmetric information refers to the fact that agents have superior knowledge and can, therefore, act against the interests of principals.

Question 29

The more widely power is distributed within a firm, the more cautious it is likely to be.

Question 30

Limited liability means that, legally, shareholders cannot take part in the running of the firm in which they have shares.

Question 31

The purpose of forming a private limited company is to encourage people to invest in large enterprises with relatively little risk.

Question 32

If a business holds interests in a number other companies or subsidiaries, business economists call this a holding company.

Question 33

If a business uses production sites in different countries to supply components, business economists call this an integrated international enterprise.

Question 34

If a business pursues a single strategy in different countries, business economists call this an integrated international enterprise.

Question 35

A company where ownership is distributed between a large number of shareholders is called a joint- stock company.

Question 36

It is common for a consortium to be formed for projects that hold relatively low risk.

Question 37

Larger firms tend to adopt either U- form or 'flatter' organisational structures.

Question 38

M- form organisational structures should give the most senior managers more time for overall strategic planning.

Question 39

Bounded rationality refers to the inability of a manager to act in the owner's best interests.

Question 40

What are transaction costs?

Question 41

How can business owners attempt to reduce the principal- agent problem?

Question 42

If a firm is cautious, will it survive?

Question 43

What are private limited companies?

Question 44

What are the main advantages of being a public limited company?

Question 45

What is a producer co- operative?

Question 46

What is the difference between M- form and U- form organisations?

Question 47

What are the advantages running a business as a partnership over a sole proprietorship?

Question 48

Why may managers not operate in the interests of owners?

Question 49

Consider a production manger of a multi- model automotive company. The manager is responsible for the production line that assembles one car. How may this manager's objectives conflict with shareholder objectives?

Question 50

Cautious firms do not survive. Discuss.