,Chapter 1: MANAGERS, PROFITS, AND MARKETS
Multiple Choice
1-1 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.
1-2 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 costs exceed revenues.
d. is generally larger than accounting profit.
1-3 Economic profit is
a. the difference between total revenue and the opportunity cost of all of the resources used in
production.
b. the difference between total revenue and the implicit costs of using owner-supplied
resources.
c. the difference between accounting profit and the opportunity cost of the market-supplied
resources used by the firm.
d. the difference between accounting profit and explicit costs.
1-4 When 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 an increase in their wealth.
d. both a and c
e. all of the above
1-5 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.
1-6 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.
Chapter 1: MANAGERS, PROFITS, AND MARKETS
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
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, 1-7 The 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
1-8 Suppose Marv, the owner-manager of Marv’s Hot Dogs, earned $72,000 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 $30,000 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.
e. both c and d.
1-9 A 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
risky profits.
c. lower the more risky the future stream of profits.
d. an additional compensation paid to the workers of a business enterprise.
1-10 Owners of a firm want the managers to make business decisions that 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.
e. choices a and b are generally not equivalent, so managers must always seek to maximize
market share.
1-11 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
e. both a and c
1-12 Moral hazard
a. occurs when managers pursue maximization of profit 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 principle-agent problems.
Chapter 1: MANAGERS, PROFITS, AND MARKETS
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
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, 1-13 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 production in the industry.
d. many other firms produce a product that is nearly identical to its product.
e. both c and d
1-14 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 will be 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 the divergence between the shareholders’
interests and the owner’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.
1-15 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
1-16 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 fewer units but will not lose all of its sales.
c. possesses market power.
d. sells a product that is somehow differentiated from the product sold by its rivals or sells
in a limited geographic market area with only one or a few sellers.
e. all of the above
1-17 A market
a. lowers 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 exclusively by capitalist nations.
d. both a and b
e. both b and c
1-18 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
Chapter 1: MANAGERS, PROFITS, AND MARKETS
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
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