chapter 1 Essay

3291 Words Apr 22nd, 2014 14 Pages

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
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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.

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…

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