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Publication Date: 02/26/2010

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Business Environment & Concepts

Publication Date: 02/26/2010

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Dissolution

Question 1

In general, for a corporation to dissolve:

AA corporation's board of directors may proposedissolution for submission to the shareholders.

BThe officers of the corporation recommenddissolution to the shareholders.

CThe corporation must notify only shareholderswho are entitled to vote.

DAdoption of the proposal to dissolve requires theapproval of 2/3 of shareholders entitled to vote.

Answer 1

Correct answer is A

In general, for a corporation to dissolve, the boardof directors votes upon a resolution proposing

dissolution. All shareholders must be notified of theresolution to dissolve. The resolution is votedupon, and can be approved by a majority of aquorum.

Question 2

Which statement is correct with respect to a court ordereddissolution of a corporation? A corporation will be dissolvedwhenever the attorney general of the state of incorporation

establishes that I. the corporation obtained its articles ofincorporation through fraud; II. the corporation has continuedto exceed or abuse the authority conferred upon it by law; III.the directors are deadlocked in the management of thecorporate affairs and the shareholders are unable to break thedeadlock.

AI only is correct.

BII only is correct

CI and II only are correct

DI, II and III are correct.

Answer 2

Correct answer is C

The Model Business Corporation Act provides that

in a proceeding by the attorney general if it isestablished that: (i) the corporation obtained itsarticles of incorporation through fraud; or (ii) thecorporation has continued to exceed or abuse theauthority conferred upon it by law, an appropriatecourt may order dissolution of the corporation. In aproceeding by a shareholder if it is established thatthe directors are deadlocked in the management ofthe corporate affairs and the shareholders areunable to break the deadlock, and irreparableinjury to the corporation is threatened, then judicialdissolution may be warranted.

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Articles of Incorporation

Question 1

Under the Model Business Corporation Act, under whatcircumstances can a corporation's board of directors amendthe articles of incorporation without shareholder approval? I. Toincrease the number of authorized shares of the class to theextent necessary to permit the issuance of shares as a sharedividend. II. To change the corporate name to a name thatbetter reflects the nature of its business.

AI only

BII only

CI and II are both correct.

DNeither I nor II is correct.

Answer 1

Correct answer is A

Section 10.05 of the Model Business CorporationAct provides: Unless the articles of incorporation

provide otherwise, a corporation's board ofdirectors may adopt amendments to thecorporation's articles of incorporation withoutshareholder approval: . . . (4) if the corporationhas only one class of shares outstanding: (a) tochange each issued and unissued authorizedshare of the class into a greater number of wholeshares of that class; or (b) to increase the numberof authorized shares of the class to the extentnecessary to permit the issuance of shares as ashare dividend; (5) to change the corporate nameby substituting the word "corporation,""incorporated," company," "limited," or theabbreviation "corp.," "inc.," "co.," or "ltd.," for a

similar word or abbreviation in the name, or byadding, deleting, or changing a geographicalattribution for the name.

Question 2

Under the Model Business Corporation Act, which is correct?The articles of incorporation must set forth any classes ofshares and series of shares within a class, and must I.authorize one or more classes or series of shares that togetherhave unlimited voting rights. II. authorize one or more classesor series of shares that have special, conditional, or limitedvoting rights.

AI only

BII only

CI and II are both correct.

DNeither I nor II is correct.

Answer 2

Correct answer is A

The articles of incorporation must authorize: (1)one or more classes or series of shares thattogether have unlimited voting rights, and (2) oneor more classes or series of shares (which may bethe same class or classes as those with voting

rights) that together are entitled to receive the netassets of the corporation upon dissolution. Thearticles of incorporation may authorize one or moreclasses or series of shares that have special,conditional, or limited voting rights, or no right tovote.

Question 3

In reviewing the proposed Articles of Incorporation of BuenaVista, Inc., to determine whether the incorporators haveincluded all necessary information, which information wouldNOT be required?

AName and address of the registered agent.

BNames of incorporators.

CPar value of stock authorized.

DName of the corporation.

Answer 3

Correct answer is C

Articles of Incorporation must include the name ofthe corporation, the name and address of a person

or entity who is authorized to accept service ofprocess and official notices on behalf of thecorporation (registered agent) and the names ofthe incorporators. Articles of Incorporation mayalso include names of the initial directors, thepurpose of the corporation, par value of stock aswell as other information.

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Question 4

Corporations from time to time amend their articles ofincorporation. Under the Model Business Corporation Act,which of the following is correct regarding such amendments?I. A shareholder of the corporation does NOT have a vestedproperty right resulting from any provision in the articles ofincorporation, including provisions relating to management,control or dividend entitlement. II. If a corporation has not yet

issued shares, its board of directors or its incorporates mayadopt one or more amendments to the corporations articles ofincorporation.

AI only is correct.

BII only is correct.

CBoth I and II are correct.

DNeither I nor II is correct.

Answer 4

Correct answer is C

A corporation may amend its articles ofincorporation at any time to add or change aprovision that is required or permitted in the articlesof incorporation as of the effective date of theamendment or to delete a provision that is notrequired to be contained in the articles of

incorporation. A shareholder of the corporationdoes not have a vested property right resultingfrom any provision in the articles of incorporation,including provisions relating to management,control, capital structure, dividend entitlement, orpurpose or duration of the corporation. If acorporation has not yet issued shares, its board ofdirectors, or its incorporates if it has no board ofdirectors, may adopt one or more amendments tothe corporations articles of incorporation.

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General considerations

Question 1

Pre-employment screening is a necessary hiring practice formany employers. With regard to pre-employment screening,which is correct?

ADrug testing is permissible.

BPsychometric testing is often utilized.

CBackground checks are common.

DAll of the above are true.

Answer 1

Correct answer is D

Drug testing is permissible, psychometric testing(measurement of attitudes and personality traits)is

often utilized. Background checks are also routinein many instances.

Question 2

Ms. Foster incorporated her business as Foster Designs, Inc.Under the Model Business Corporations Act, which of thefollowing statements is correct?

AFoster cannot be the sole shareholder of the

corporation.BThe corporation will be unlawful if Foster

incorporated solely for the purpose of limiting herliability.

CFoster Designs, Inc., must designate a registeredagent for the purpose of receiving notice on behalf of thecorporation.

DIf Foster dies, Foster Designs, Inc., isautomatically terminated if Foster is the sole employee.

Answer 2

Correct answer is C

An individual may incorporate for the purpose oflimiting his/her personal liability, and may be thesole employee and sole shareholder of the

corporation. The corporation, however, hasperpetual existence and does not automaticallycease with the death of its sole shareholder. (If theannual corporation fees are not properly paid, thecorporation will be terminated.) A corporation mustname a registered agent to receive service ofprocess and other official notices on behalf of thecorporation.

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Business judgment rule

Question 1

In an action brought by Kline, a minority shareholder inTinType Corporation, Kline established that the corporationnegligently opened a satellite sales facility in a foreign countrywhich was at the time experiencing significant political and civilunrest. The facility was ultimately closed, resulting in losses toTinType Corporation of in excess of $25,000,000, which, inturn, resulted in a severe decline in the value of Kline's stock.With regard to the liability of the officers and directors ofTinType Corporation, the Business Judgment rule

Ais a minority rule, not followed in most moderncourts.

Bprovides for liability of officers and directors whofail to exercise reasonable business judgment.

Crequires proof of fraud, gross negligence or badfaith in order to recover.

Dapplies a strict liability standard for officers, but

not directors.

Answer 1

Correct answer is C

Under the Business Judgment rule, officers anddirectors will not be liable for acts which involve

their business judgment as long as they acted ingood faith and were not grossly negligent.

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Bylaws

Question 1

Under the Model Business Corporation Act, which of thefollowing is a correct statement?

AOnly a corporation's directors may amend orrepeal the corporation's bylaws.

BBylaws may be amended unless the articles ofincorporation reserve that power exclusively to theshareholders.

CA corporation's bylaws canNOT be repealed.

DBylaws may be amended by the corporation'sofficer's.

Answer 1

Correct answer is B

A corporation's shareholders may amend or repealthe corporation's bylaws. In addition, a

corporation's board of directors may amend orrepeal the corporation's bylaws, unless: (1) thearticles of incorporation or section 10.21 reservethat power exclusively to the shareholders in wholeor part; or (2) the shareholders in amending,repealing, or adopting a bylaw expressly providethat the board of directors may not amend, repeal,or reinstate that bylaw.

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Stock

Question 1

Which if the following is/are correct under the Model BusinessCorporation Act with regard to articles of incorporation? I.shares of one class may be authorized to elect a specifiednumber of directors while shares of another class may beauthorized to elect the same or a different number of directors;II. shares of one class may be entitled to different dividendrights or rights on dissolution.

AI only

BII only

CBoth I and II are correct

DNeither I nor II is correct

Answer 1

Correct answer is C

The Model Business Corporation Act permits theauthorization of stocks with varying degrees of

dividend rights, voting rights, and rights to assetson dissolution.

Question 2

A stockholder of the Chaplin Corporation received each of thefollowing items. All of them are considered asset or capitaldistributions, except:

Aa stock split of 300 previously unissued shares ofthe companys stock

Ba distribution of three acres of land

Ca dividend of $3,000 based on the profits of thecompany

Da dividend of $2,000 in cash that is deemed to bea liquidating dividend

Answer 2

Correct answer is A

A stock split is a type of stock dividend that neitherreduces the assets of the business nor increasesthe stockholders percentage of the ownership. Itis not viewed as a distribution but rather as anattempt by the company to reduce the market priceof the companys stock by increasing the supply. Itis not viewed as an asset or capital distribution.The business is no worse off and the stockholderis no better off.

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Derivative suits

Question 1

A Derivative proceeding means a civil suit in the right of adomestic corporation. Under the Model Business Corporation

Act, which of the following is a correct statement regardingderivative actions?

AA shareholder may commence a derivativeproceeding even though s/he was not a shareholder ofthe corporation at the time of the act or omissioncomplained of.

BA shareholder may commence or maintain aderivative proceeding regardless whether theshareholder fairly represents the interests of thecorporation.

CUnless irreparable injury is involved, noshareholder may commence a derivative proceedinguntil a written demand has been made upon thecorporation to take suitable action.

DBefore commencing a derivative suit, ashareholder must wait six months after making demandfor action.

Answer 1

Correct answer is C

A shareholder may not commence or maintain aderivative proceeding unless the shareholder: (1)

was a shareholder of the corporation at the time ofthe act or omission complained of or became ashareholder through transfer by operation of lawfrom one who was a shareholder at that time; and,(2) fairly and adequately represents the interests ofthe corporation in enforcing the right of thecorporation. No shareholder may commence aderivative proceeding until: (1) a written demandhas been made upon the corporation to takesuitable action; and (2) 90 days have expired fromthe date the demand was made unless theshareholder has earlier been notified that thedemand has been rejected by the corporation orunless irreparable injury to the corporation would

result by waiting for the expiration of the 90 dayperiod.

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Extraordinary transactions

Question 1

The management of Bowden Corporation approached keypersonnel of Mx, Incorporated for the purpose of exploring amerger or consolidation of assets of the two corporations. Afterextensive negotiations it was determined that Mx would mergeinto and become a part of Bowden Corporation. With regard tothe merger

Amajority approval of both companies shareholdersis required.

Bif 95% of Bowden shareholders agree to themerger, dissenting shareholders are without recourse.

Cif the directors of Bowden Corporation approve,approval by Bowdens shareholders will NOT berequired.

DMx, Incorporated must file new articles ofincorporation if the merger occurs.

Answer 1

Correct answer is A

Extraordinary transactions between corporations(mergers, consolidations, sale of all assets) involve

three steps. First, the board of directors of eachcorporation meets and decides on the action, thenmakes a recommendation to shareholders.Second, shareholders vote, and unless the articleor bylaws of the corporation provide otherwise, therecommended action must be approved by majorityvote of the shareholders. Finally, dissentingshareholders have appraisal rights, meaning thatthey may demand to be paid the value of theirshares immediately prior to the transaction.

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Directors, shareholders

Question 1

Phillips and Broaddus are each 50% shareholders in AngelCorporation, a manufacturer of luxury sail craft. Broaddus ispresident and runs the day to day affairs of the business.Phillips considers herself a "silent partner" since her onlyinvolvement in the business is that she provided financing atthe company's inception. Angel Corporation was dulyincorporated. Which statement is correct?

ACorporate governance is generally a matter offederal law.

BBroaddus and Phillips an equal say in theselection of directors.

CPhillips has the authority to fire Broaddus aspresident.

DBroaddus cannot transfer his stock ownershipwithout first offering the stock to Phillips for its fairmarket value.

Answer 1

Correct answer is B

Directors are selected by the shareholders and as50% shareholders, Phillips and Broadus each has

an equal vote. Corporations and how they aregoverned is a matter of state law, not federal law. Aright of first refusal is generally a matter ofshareholder agreement or of bylaws of thecorporation and, in the majority of jurisdictions, isnot imposed by law.

Question 2

Summers is the owner of 5 percent of the outstanding commonstock of Scher Corporation, holding a far greater share of thecompany than any other individual or entity. Gregory, thepresident of Scher, has convinced Scher's board of directors todouble Gregory's compensation for the upcoming fiscal yeareven though Scher's profitability is flat. Summers is unhappywith that action. Summers can

Aterminate Gregory with or without cooperation ofthe board of directors.

Bcause the board to terminate Gregory by filing aderivative suit.

Cbest exert his influence by voting for or against thedirectors at the next annual meeting.

Dforce the board, through a derivative action, toreduce Gregory's compensation to a reasonableamount.

Answer 2

Correct answer is C

The power to set compensation is vested inmanagement, and overseen by the board ofdirectors. Even a shareholder who has a significantstock holding has no power to hire or fire an officernor to directly vote upon officer compensation.Shareholders may vote for or against directors atannual shareholder meetings.

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Meetings

Question 1

Under the provisions of the Model Business Corporation Act:

AA shareholder may waive any notice required bythe Act, the articles of incorporation, or bylaws, but onlybefore the date and time stated in the meeting notice.

BA corporation must notify shareholders of thedate, time, and place of each annual and specialmeeting no fewer than 30 nor more than 120 daysbefore the meeting date.

CAction required or permitted by the CorporationAct to be taken at a shareholders' meeting may be takenwithout a meeting if the action is consented to by all theshareholders entitled to vote on the action.

DA corporation may hold a meeting of shareholdersannually, but is not required to do so.

Answer 1

Correct answer is C

A corporation must hold a meeting of shareholdersannually at a time stated in or fixed in accordance

with the bylaws. A corporation must notifyshareholders of the date, time, and place of eachannual and special shareholders' meeting no fewerthan 10 nor more than 60 days before the meetingdate. Unless the Act or the articles of incorporationrequire otherwise, the corporation is required togive notice only to shareholders entitled to vote atthe meeting. A shareholder may waive any noticerequired by the Act, the articles of incorporation, orbylaws before or after the date and time stated inthe notice. The waiver must be in writing, besigned by the shareholder entitled to the notice,and be delivered to the corporation for inclusion inthe minutes or filing with the corporate records.

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Proxies

Question 1

Under the Model Business Corporation Act, which of thefollowing statements regarding proxies is INCORRECT?

AA shareholder may vote his shares in person orby proxy.

BAn appointment of a proxy is effective at the timeit is executed.

CA proxy appointment is valid for 12 months.

DAn appointment of a proxy is revocable unless theappointment form or electronic transmission states thatit is irrevocable and the appointment is coupled with aninterest.

Answer 1

Correct answer is B

A shareholder may vote his shares in person or byproxy. An appointment of a proxy is effective when

a signed appointment form or an electronictransmission of the appointment is received by theinspector of election or the officer or agent of thecorporation authorized to tabulate votes. Anappointment is valid for 11 months unless a longerperiod is expressly provided in the appointmentform. An appointment of a proxy is revocableunless the appointment form or electronictransmission states that it is irrevocable and theappointment is coupled with an interest.

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Dividend Payments

Question 1

Marko Corp. is planning to declare a dividend. Which of thefollowing statements is correct?

AMarko Corp.'s president must approve thedividend.

BRestrictions on dividends may NOT be included inMarko Corp.'s Articles of Incorporation.

CA dividend may be declared by the directors or bya vote of a majority of the shareholders.

DNo distribution may be made if the distributionwould severely impede the corporation's ability to pay itsdebts as they come due.

Answer 1

Correct answer is D

Dividends are declared by the directors. Articles ofincorporation may include restrictions on the

directors in this regard. In addition, no distributionmay be made if, after giving it effect: (1) thecorporation would not be able to pay its debts asthey become due in the usual course of business;or (2) the corporation's total assets would be lessthan the sum of its total liabilities plus (unless thearticles of incorporation permit otherwise) theamount that would be needed, if the corporationwere to be dissolved at the time of the distribution,to satisfy the preferential rights upon dissolution ofshareholders whose preferential rights are superiorto those receiving the distribution.

Question 2

A company issues 100,000 shares of common stock and10,000 shares of preferred stock with a $2 cumulativedividend. In the first year, no dividends are paid or declared.Which of the following statements are true?

AThe company should report a $20,000 liability onits year-end balance sheet.

BAll dividends in arrears on the preferred stockmust be paid before any dividends can be paid oncommon stock.

CThe preferred stockholders are guaranteed to

receive this $20,000 at some point in the future.DBy not paying the cumulative dividend, thecompany will be forced into bankruptcy within 90 days ofthe beginning of the new year.

Answer 2

Correct answer is B

A cumulative preferred stock simply means that alldividends on the preferred stock must be paid asrequired before any dividends can be distributed tothe owners of the common stock. The company isnot obligated in any other way. There is noguarantee nor liability and failure to pay will notautomatically lead to bankruptcy. However, if theboard of directors ever formally declares thesedividends, the liability must be reported.

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Officers

Question 1

Giles G. Powers, president of Powers Placement Services,Inc., is also a company director. As the result of a dispute withother members of the board of directors, Powers created GilesPlacement Services, Inc. Powers

Ahas NOT breached his fiduciary duty to PowersPlacement Services, Inc., even if Giles PlacementServices, Inc., competes for the same business as longas proper notice was given.

Bwould have no fiduciary duty to Powers PlacementServices, Inc., if he resigned his position as presidentand board member before organizing the new business.

Cwould only be restricted from competing withPowers Placement Services, Inc., if a noncompeteagreement had been entered into.

Dhas a fiduciary duty to Powers PlacementServices, Inc., as long as his name remains part of the

company name.

Answer 1

Correct answer is B

Officers and directors of a corporation owe thecorporation certain duties, the most important of

which is the fiduciary duty. A fiduciary duty requiresthat one act in the best interest of the companyand not in his or her own interest. Taking businessfrom Powers Placement Services, Inc., bycompeting with it would constitute a breach ofPowers's fiduciary duty. If Powers first resigns fromPowers Placement Services, Inc., he would nolonger have a fiduciary duty to the company.

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Piercing the veil

Question 1

Henry Wiston was president of Gravitas Enterprises, Inc.,which engaged in consulting services in the processed foodsindustry. With respect to debts of the corporation, Wiston willbe subject to personal liability if

Ahe incorporated for the sole purpose of limiting hispersonal liability.

Bhe undercapitalized the corporation.

Che is the sole shareholder of Gravitas Enterprises,Inc.

Dthe corporation has insufficient insurance to coverthe activities in which he ordinarily engages in hiscapacity as president.

Answer 1

Correct answer is B

A creditor may "pierce the corporate veil" and holdmanagement of a corporation liable as partners (or

as a sole proprietor) if the corporation was notsufficiently capitalized. Insufficient capital is a redflag that a corporation was started as a sham.There is no specific formula to ascertain whether acompany is adequately capitalized. Adequatecapitalization is measured by the nature andmagnitude of the corporate undertaking at the timeof the company's formation. Incorporating for thesole purpose of limiting one's personal liability,being a sole shareholder, or having insufficientinsurance coverage are not grounds for piercingthe limited liability protection which the corporationprovides its owners.

Question 2

Peter and Paul Maxwell are brothers and are president andCFO, respectively, of Maxwell Corporation. Rocky Bank, acreditor of Maxwell Corporation, seeks to pierce the corporateveil of Maxwell Corporation and hold the Maxwell brotherspersonally liable for the business's debt to the bank. Which ofthe following would be least persuasive in convincing a court topierce the corporate veil?

APeter and Paul Maxwell are sole shareholders ofMaxwell Corporation.

BPaul Maxwell used his position in the business tocommit fraud.

CPeter Maxwell exerted his control of the businessto violate a statutory duty.

DMaxwell Corporation has failed to maintaincorporate records or hold corporate meetings.

Answer 2

Correct answer is A

The fact that Peter and Paul Maxwell are soleshareholders of Maxwell Corporation is relevant tothe inquiry of whether to pierce the corporate veiland hold management individually liable, but it theleast important factor listed. To prevail a plaintiffmust prove that the defendant completelydominated the business to the extent that thecorporation had no separate mind, will or existenceof its own. The court will also examine whether the

defendant used the control to commit fraud orother wrong or to violate a statutory or other legalduty. Piercing the corporate veil is also known asthe "alter ego" doctrine.

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S Corporation

Question 1

A corporation may elect treatment as an S Corporation underthe Internal Revenue Code even if it has: I. more than 100shareholders; II. more than one class of stock. Which iscorrect?

AI only is permitted.

BII only is permitted.

CBoth I and II are permitted.

DNeither I nor II is permitted.

Answer 1

Correct answer is D

An "eligible" corporation may elect treatment as anS Corporation under the Internal Revenue Code

only if it is a domestic corporation which does not:(A) have more than 100 shareholders, (B) have asa shareholder a person (other than an estate orcertain trusts) who is not an individual, (C) have anonresident alien as a shareholder, and (D) havemore than one class of stock.

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Stock, Par value

Question 1

Foy Corporation issued 500 shares of $100 par value stock toDale. Dale sold 300 shares to Ving for $15,000 who knew thatthe price was same price which Dale had paid for the stock.Three months later, Foy Corporation dissolved withoutsufficient assets to pay creditors. County Bank, an unsecuredcreditor of Foy Corporation, wishes to hold Dale or Ving liablefor the unpaid par value of their stock. County Bank mayrecover

Anothing from Ving, but $25,000 from Dale.

B$25,000 from Ving and $25,000 from Dale.

C$15,000 from Ving.

D$50,000 from Dale.

Answer 1

Correct answer is C

A purchaser of stock which has been assigned apar value must pay at least par, or be liable to

creditors for the difference. One who purchasesstock knowing that par has not been paid willsimilarly be liable.

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Corporations general requirements

Question 1

Under the Model Business Corporation Act, all of the followingare true EXCEPT:

AA corporate name must contain the wordcorporation, incorporated, company, or limited, oran abbreviation of one of these.

BA corporations name must be distinguishablefrom the fictitious name adopted by a foreign corporationauthorized to transact business in the state.

CA corporation may NOT change its registeredoffice or registered agent once it is filed with theSecretary of the Corporation Commission.

DArticles of incorporation must authorize one ormore classes or series of shares that together haveunlimited voting rights.

Answer 1

Correct answer is C

Articles of incorporation must authorize: (1) one ormore classes or series of shares that together have

unlimited voting rights, and (2) one or more classesor series of shares (which may be the same classor classes as those with voting rights) that togetherare entitled to receive the net assets of thecorporation upon dissolution. A corporation maychange its registered office or its registered agentat any time, but must must properly file suchchange with the Secretary of the CorporationCommission.

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Subscriptions before incorporating (6.20)

Question 1

The Model Business Corporation Act sets forth parameters forpre-incorporation stock subscriptions. The Act requires all ofthe following EXCEPT:

AA subscription for shares entered into beforeincorporation is irrevocable for six months unless thesubscription agreement provides a longer or shorterperiod.

BThe board of directors may determine thepayment terms of subscription for shares that wereentered into before incorporation unless the subscriptionagreement specifies them.

CA call for payment by the board of directors neednot be uniform as to all shares of the same class.

DIf a subscriber defaults in payment of money orproperty under a subscription agreement, thecorporation may collect the amount owed as any other

debt.

Answer 1

Correct answer is C

Section 6.20 of the Model Business CorporationAct provides (in pertinent part): (a) A subscription

for shares entered into before incorporation isirrevocable for six months unless the subscriptionagreement provides a longer or shorter period orall the subscribers agree to revocation. (b) Theboard of directors may determine the paymentterms of subscription for shares that were enteredinto before incorporation, unless the subscriptionagreement specifies them. A call for payment bythe board of directors must be uniform so far aspracticable as to all shares of the same class orseries, unless the subscription agreementspecifies otherwise. If a subscriber defaults inpayment of money or property under a subscriptionagreement, the corporation may collect the amount

owed as any other debt.

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Supply and Demand

Question 1

Which of the following causes a reduction in the quantitydemanded of product X?

AConsumers see product X as less desirable.

BConsumers buy more of a substitute good for X.

CThe price of X increases.

DConsumers have higher income and X is aninferior good.

Answer 1

Correct answer is C

The question requires a distinction betweenmovement along a demand curve (change in

quantity demanded) and a shift of the demandcurve (a change in demand). The Law of Demandis based on a downward sloping demand curvewhere quantity demanded and price are inverselyrelated, everything else equal. In this case areduction in the quantity demanded is a movementalong the demand curve due to a higher price.

Answers A, B and D cause a shift in the demandcurve (change in demand) rather than movementalong the demand curve. According to the law ofdemand, C is the correct answer. An increase inprice causes a reduction of the quantitydemanded.

Question 2

Cool Cola and Sparkle are substitute soft drinks. Which of thefollowing would occur if the price of Cool Cola increased?

AThe demand for Sparkle will increase and thedemand curve shifts right.

BThe supply of Cool Cola will decrease and thesupply curve shifts left.

CThe supply of Sparkle will decrease and thesupply curve shifts left.

DThe demand curve for Cool Cola will decrease and

the demand curve shifts left.

Answer 2

Correct answer is A

Consumers react to a change in the price of onesubstitute good with a change in demand for theother good. In this case, a higher price for CoolCola makes consumers increase the demand forthe substitute good Sparkle. This would be a shiftof demand for Sparkle to the right, making A thecorrect answer.

Question 3

When the price of product X went up the demand for product Ydecreased. In this case, which of the following must be true?

AProducts X and Y are substitutes.

BProduct Y is an inferior good

CProduct Y is a normal good

DProducts X and Y are complements.

Answer 3

Correct answer is D

Complements are goods that are used together. Ifone good becomes more expensive, there will be areduction in the consumption of that good and areduction in the consumption of the complementtoo. In this case, the correct answer is D. A higherprice for X results in a reduction in quantitydemanded for X and a shift in the demand to the

left for the complement Y.

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Question 4

When consumer income decreased, the consumption oflunchmeat fell and the consumption of peanut butter increased.Everything else equal, which of the following must be true?

ALunchmeat and peanut butter are substitutegoods.

BLunchmeat and peanut butter are complements.

CLunchmeat is an inferior good.

DPeanut butter is an inferior good.

Answer 4

Correct answer is D

When income rises consumers buy less of aninferior good and more of a normal good. In thiscase, peanut butter is an inferior good andlunchmeat is a normal good, making D the correctanswer.

Question 5

Everything else equal, what happens to the market equilibriumfor cell phones if input prices for making cell phones increases?

AThe supply of cell phones decreases and the priceof cell phones rises.

BThe supply of cell phones increases and the priceof cell phones rises.

CThe supply of cell phones decreases and the priceof cell phones falls.

DThe supply of cell phones increases and the priceof cell phones falls.

Answer 5

Correct answer is A

An increase in input prices will shift the supplycurve of cell phones left (reduced quantity suppliedfor every price). Everything else equal, the newequilibrium where the supply and demand curvesintersect will be at a higher price for cell phones.

Question 6

When the price of product Z increases from $10 to $11 thequantity demanded declines from 500 units to 450 units. Whichof the following is true?

AThe demand for product Z is price elastic

BThe demand for product Z is price inelastic.CThe demand for product Z has unit price elasticity.

DProduct Z is an inferior good..

Answer 6

Correct answer is C

When the price increases by 10% (1/10) thequantity demanded falls 10% (50/500). Thepercentage change in quantity demanded dividedby the percentage change in price is one. In thiscase the elasticity of demand is one (unit priceelasticity).

Question 7

Which of the following products has the lowest price elasticityof demand?

AAutos

BRecreational vehicles

CBread

DFurniture

Answer 7

Correct answer is C

Products with a low elasticity of demand are notprice sensitive. These products are generally asmall percent of a consumer's budget, a necessityrather than a luxury, a consumption good ratherthan a durable good, and a good for which there isno good substitute. Answers A, B, an D are ratherlarge ticket items that make up a large part of aconsumer's budget. They also tend to be luxuriesrather than necessities. Answer C is the bestexample of a good with low elasticity of demand.

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Question 8

The price of a normal good increases. Which of the following istrue?

AThe quantity demanded falls due to both thesubstitution and income effects.

BThe quantity demanded falls due to thesubstitution effect but increases due to the incomeeffect.

CThe quantity demanded increases due to thesubstitution and income effects.

DThe quantity demanded increases due to thesubstitution effect and falls due to the income effect.

Answer 8

Correct answer is A

The substitution effect occurs when a product pricegoes up and consumers switch to another cheaperproduct, resulting in a decrease in quantitydemanded. The income effect occurs when theprice of a good goes up effectively reducing the

amount of income left to consume a "normal good."In this case, the higher product price reduces thequantity demanded due to the substitution effectand also reduces the quantity demanded due tothe income effect. If the product were an inferiorgood rather than a normal good, the lower incomewould result in an increase in the quantitydemanded.

Question 9

Which of the following is capable of explaining a lower marketequilibrium price for cell phones?

AA change in consumer tastes and preferencesmaking cell phones more attractive.

BIncreased consumer income when cell phonesare a normal good.

CAn increased expectation for higher prices of cellphones in the future.

DAn improved technology that makes it cheaper toproduce cell phones.

Answer 9

Correct answer is D

This question revolves around factors causingshifts in supply and demand. The correct answer isD since the improved technology would cause thesupply curve to shift to the right, resulting in alower equilibrium price. The other answers all shiftthe demand curve to the right (increased demand),which would result in a higher price for cell phones.

Question 10

When we observe a 5% increase in the price of product Wthere is a corresponding 2% increase in the quantitydemanded for product Z. Which of the following is true?

AProducts W and Z are substitutes.

BProducts W and Z are complements.

CProduct Z is an inferior good.

DProduct Z is a normal good.

Answer 10

Correct answer is AProducts W and Z have a positive cross elasticity(2% / 5% > 0). Consumers see Z as a substitutefor W and consume more Z when W becomesmore expensive. The correct answer is A. B wouldbe true only if the consumption of Z went downwhen the price of W went up. Answer C refers to aproduct where consumers buy more of it whenincome falls. Answer D refers to a good whereconsumers buy less of it when income rises.

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Question 11

A company producing product G is considering a priceincrease. Market research suggests that a 1% increase in priceresults in a 2% reduction in quantity demanded. Which of thefollowing is true?

AThe company will have higher total revenue if itincreases the price of product G.

BThe company will have lower total revenue if itincreases the price of G.

CTotal revenue will stay the same if the companyincreases the price of product G.

DWithout knowing more information it is impossibleto know how a price increase will affect total revenue.

Answer 11

Correct answer is B

Product G has an elastic demand since theabsolute value of the percent change in quantitydemanded exceeds the absolute value of thepercentage change in price. When demand iselastic, an increase in price makes the total

revenue smaller. Answer B is correct in this case.Answer A would be true if the demand for G wereinelastic. C would be true if the demand for G hasunitary elasticity. D is incorrect because we cantell how total revenue moves when a price changeoccurs if we know about the elasticity of demand.

Question 12

A federal law sets a price floor for milk. Which of the followingoccurs due to a binding price floor?

AAn excess demand for milk relative to the supplyof milk.

BAn excess supply of milk relative to the demandfor milk.

CMore price competition in the milk market.

DLess non-price competition in the milk market.

Answer 12

Correct answer is B

A price floor is a minimum price that is only binding

if it is set higher than the market price for milk. Atthe binding floor price above the equilibrium price,surpluses develop (QS > QD). This also causesmore non-price competition among sellers and areduction in quantity demanded by consumers.The correct answer is B. A is appropriate for a priceceiling below the equilibrium price. C and D areincorrect because the price floor increasesnon-price competition and reduces pricecompetition.

Question 13

Assume the federal government sets a binding price floor forhoney. Which of the following is true in this case?

AThe price floor is above the equilibrium marketprice of honey causing a surplus of honey (quantitysupplied exceeds quantity demanded.)

BThe price floor is above the equilibrium marketprice of honey causing a deficit of honey (quantitydemanded exceeds quantity supplied).

CThe price floor is below the equilibrium marketprice of honey causing a surplus of honey (quantitysupplied exceeds quantity demanded).

DThe price floor is below the equilibrium marketprice of honey causing a deficit of honey (quantitydemanded exceeds quantity supplied).

Answer 13

Correct answer is APrice floors are set to provide producers with aprice higher than what can be obtained in a freemarket, making C and D incorrect. Note that a floor(minimum price) below the market equilibriumwould be non-binding. The floor is above themarket equilibrium resulting in a quantity suppliedgreater than the quantity demanded at the floorprice. The answer is A.

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Question 14

A local lake is used for recreation and as a source of water forthe community. Recreation causes some pollution of the waterbut a major source of pollution comes from a manufacturingplant that disposes waste into the lake. A local officialmaintains that a recreation use tax should be set to clean thelake and that the manufacturer should pay a special tax inexcess of the recreation tax. Which of the following is

consistent with the official's proposal?

APrice leadership

BPrice ceiling

CFull Cost Accounting

DFixed Cost

Answer 14

Correct answer is C

This case represents an externality where themanufacturer imposes a cost on other users of thelake. The externality is "internalized" by making themanufacturer pay for the added costs imposed onother users of the lake. This concept is called full

cost accounting. Answer C is correct.

Question 15

You see a simultaneous decrease in supply and demand fortobacco products. Which of the following represents the effectof these shifts on output quantity and market price?

AOutput quantity decreases and output priceincreases.

BOutput quantity decreases and output price isindeterminate.

COutput quantity increases and output pricedecreases.

DOutput quantity and output price will both fall.

Answer 15

Correct answer is B

Starting with an equilibrium, a shift of the supply

curve to the left and a shift of the demand curve tothe left will give a new equilibrium with a lowerlevel of output but the change in price will dependon the relative magnitude of the shift in supplyrelative to the shift in demand. Price may go up,go down, or stay the same.

Question 16

The Federal Government sets a price freeze on gasoline prices

at the pump. Which of the following is a consequence of theprice freeze?

AA reduction in demand for gasoline at the pump.

BAn excess quantity demanded for gasoline relativeto the quantity supplied of gasoline at the pump.

CA reduction in the supply of gasoline at the pump.

DAn excess quantity supplied of gasoline relative tothe quantity demanded for gasoline at the pump.

Answer 16

Correct answer is B

The price freeze sets an artificial price for gasolinethat is lower than the market price. This does notinvolve a shift of demand (Answer A) or a shift ofsupply (Answer C). A freeze price below themarket price results in a quantity demanded that isgreater than the quantity supplied (Answer B).

Question 17

Which of the following is likely to cause a surplus for a givenproduct?

AA price ceiling

BA price freeze

CA price floor

DA reduction in an input price

Answer 17

Correct answer is CA surplus occurs when the quantity suppliedexceeds the quantity demanded. We observe asurplus when an artificial price is set above themarket equilibrium price. Answer C is correctbecause a binding price floor is set above themarket equilibrium price to provide a minimumprice for producers. Note that if the price floor is notabove the market price it is not binding becausethe market price would be a minimum.

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Question 18

A government policy provides a subsidy for the production ofcorn. Which of the following is a consequence of this policy,everything else equal?

AShift the supply curve of corn to the rightincreasing the supply of corn.

BShift the demand curve for corn to the leftreducing the demand for corn.

CShift the supply curve for corn to the right and shiftthe demand curve for corn left.

DShift the supply curve for corn to the left and shiftthe demand curve for corn to the right.

Answer 18

Correct answer is A

A subsidy effectively reduces the costs ofproducing a product. In this case the subsidy willincrease the production of corn, shifting the supplycurve to the right making B incorrect and A correct.The demand curve is unaffected by the subsidy,

making C and D incorrect..

Question 19

When the price of product R increased by 2% the quantitysupplied of R increased 1%. Which of the following isconsistent with this information?

AThe supply of R is elastic.BThe supply of R is inelastic.

CThe supply of R has unitary elasticity.

DR must be a normal good

Answer 19

Correct answer is B

An inelastic supply curve occurs when thepercentage change in quantity supplied is less

than the percentage change in price. In this casethe percentage change in quantity supplied is 1%when the percentage change in price is 2%. Themeasure of supply elasticity is .5. The correctanswer is B, the supply is inelastic.

Question 20

If consumers and producers expect higher prices for shoes inthe future, which of the following would be true?

AThe change in the equilibrium price isindeterminate but the equilibrium quantity will decrease.

BThe equilibrium price will increase and theequilibrium quantity is indeterminate.

CThe equilibrium price will fall and the equilibriumquantity will fall.

DThe change in the equilibrium price isindeterminate and the equilibrium quantity will increase.

Answer 20

Correct answer is D

Producers respond to higher expected prices forshoes by producing more today, shifting the supplycurve to the right. Consumers respond to expectedhigher prices of shoes by buying more shoestoday, shifting the demand curve right. The newequilibrium is to the right (higher quantity) but theprice is indeterminate, depending on the magnitudeof each shift. Answer D is the correct response.

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Question 21

A company sells widgets for $100 each and demand is 10,000units per year. The company is thinking of raising the price to$102. Which of the following statements is true?

AIf 10,000 units are now demanded by customers,demand is said to be elastic.

BIf 9,900 units are now demanded by customers,

demand is said to be inelastic.CIf 9,800 units are now demanded by customers,

demand is said to be inelastic.

DIf 9,700 units are now demanded by customers,demand is said to be inelastic.

Answer 21

Correct answer is B

The price of the goods has gone up 2 percent($2/$100). The fall in demand is 0 (10,000 units), 1percent (9,900 units), 2 percent (9,800 units), or 3percent (9,700 units). Demand elasticity is foundby taking the change in quantity demand anddividing it by the change in price. If the ratio is

greater than 1, demand is said to be elastic (peoplemove to other products to avoid the increase). Ifthe ratio is less than 1, demand is inelastic (peoplestick with the product despite the rise in prices). Ifthe ratio is 1, demand is unitary. Since the pricewent up 2 percent, any drop of more than 2percent gives a ratio of more than one and demandis elastic. Since the price went up 2 percent, anydrop of less than 2 percent gives a ratio of lessthan one and demand is inelastic. (A) is less than 2percent so the ratio is less than one and that isinelastic. (C) is exactly 2 percent so that is unitary.(D) is more than 2 percent which gives a ratio ofmore than one and demand is elastic. (B) is theanswer because demand fell only 1 percent whichmakes the ratio 1/2 or less than 1. Demand isinelastic; few people switched to other productsdespite the increase in price.

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Consumer Choice

Question 1

A consumer has $40,000 of disposable income to spend ondurable and nondurable goods. The price of durable goods is$1,000 per unit and the price of non-durable goods is $100 perunit. Which of the following is true?

AThe consumer has a budget constraint with aslope of 1 non-durable good for 1 durable good.

BThe consumer's optimal consumption will occurwhere the ratio of the marginal utility of durable goods tothe marginal utility of non-durable goods is 10 to 1.

CThe consumer's optimal consumption will occurwith 10 times more consumption of non-durable goodsas durable goods.

DThe consumer's optimal consumption of durablegoods and non-durable goods will occur where there are40 times more non-durable goods than durable goods.

Answer 1

Correct answer is B

The consumer's budget constraint provides thepossible tradeoff between non-durable and durable

goods based on prices. Answers A, C, and D areincorrect because they have the wrong slope(tradeoff) between non-durable and durable goods.Optimal consumption subject to the budgetconstraint requires knowing consumer preferencesas well as the budget constraint. In this case theoptimal condition occurs where the ratio of theprice of non-durable goods to the price of durablegoods (1/10) equals the ratio of the marginal utilityof consumption of non-durable goods to themarginal utility of consumption of durable goods.

Answer B describes this condition. Note that this isthe same condition as setting the marginal utility ofconsuming nondurable goods divided by the price

of non-durable goods equal to the ratio of themarginal utility of consuming durable goods dividedby the price of durable goods.

Question 2

Which of the following is consistent with the DiminishingMarginal Utility Principle?

AConsumers have less total utility from consumingadditional units of a good.

BEach increment of additional consumption of agood provides a smaller increment of additional utility.

CThe first unit of consumption of a good offers asmaller increment to total utility than following units ofconsumption of a good.

DEach increment of additional consumption of agood provides a larger increment of additional utility.

Answer 2

Correct answer is B

The additional utility from consumption of onemore unit of a good is the marginal utility.Diminishing marginal utility occurs when theaddition to total utility of the last unit of a goodconsumed is less than the addition to total utility of

the consumption of the prior unit of a good. Thisrelationship is explained by answer B.

Question 3

When consumer income increases from $40,000 per year to$42,000 per year, consumers increased consumption by$1,500 per year. Which of the following is true in this case?

AThe marginal propensity to consumer is 1.5.BThe marginal propensity to save is .75.

CThe marginal propensity to consume is .25.

DThe marginal propensity to save is .25.

Answer 3

Correct answer is D

The marginal propensity to consume is equal to thechange in consumption divided by the change in

income. In this case the marginal propensity toconsumer is .75. The marginal propensity to saveis equal to 1 - marginal propensity to consume. Inthis case, the marginal propensity to save is .25.The correct answer is D.

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Question 4

Products X and Y are complements. The cross-elasticity ofdemand for product X with respect to Y must be:

AZero

BLess than Zero

CGreater than Zero

DGreater than 1

Answer 4

Correct answer is B

For complements, when the price of one goodgoes up it not only reduced the quantity demandedfor that good but it also reduces the demand for thecomplement. In terms of an elasticity, we observea negative percentage change in the demand forproduct Y in response to a positive percentage

increase in the price of X, if Y and X arecomplements. The cross-elasticity of demand isnegative for complements, making B the correctanswer.

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Production

Question 1

Which of the following must be true in the long run?

AFixed costs must be higher than variable costs.

BThere are no variable costs in the long run.CThere are no fixed costs in the long run.

DFixed costs decline rapidly as production goes up.

Answer 1

Correct answer is C

In the long run all costs are variable, making C thecorrect answer. Firms can change the scale of

operations in the long run while the scale is fixedin the short run.

Question 2

Which of the following is true about the short run cost structureof a firm as the quantity produced increases?

AAverage fixed costs decline and then rise as thefirm produces more output.

BAverage total costs reach a minimum whenaverage total cost equals marginal cost.

CWhen marginal costs are higher than averagetotal costs the average total cost declines.

DMarginal costs continue to decline as the firmproduces more output.

Answer 2

Correct answer is B

In the short run, fixed costs decline as the firmproduces more output (A is false), since the fixedcost is spread out over more units. When themarginal cost is above the average total cost theaverage total cost must be increasing (C is false).

Marginal costs decline in the early stages ofproduction but increase as the law of diminishingreturns sets in. The inefficiencies of putting morevariable inputs to work with the same fixed inputswill eventually make marginal costs higher (D isfalse). Average total costs decline as long as theyare above marginal costs (incremental costs areless so the average comes down). When themarginal cost is above the average total cost theaverage total cost must be increasing (the lastincrements are higher than the average so theaverage rises). The average reaches its minimumwhen it is equal to the marginal cost. As themarginal cost continues to increase and rises

above the average total cost the average total costmust begin to increase ( B is correct).

Question 3

What eventually happens as a firm produces more and more ofan output with a fixed production capacity (fixed cost)?

AEfficiency increases and marginal costs decline.

BMarginal productivity of inputs increases.

CThe Law of Diminishing Returns sets in.

DAverage fixed costs increase.

Answer 3

Correct answer is C

In the short run the firm has fixed costs (fixedproduction capacity). As more variable inputs areadded to the fixed inputs the efficiency(productivity) begins to decline. This phenomena iscalled the Law of Diminishing Returns (Answer C iscorrect). Marginal costs increase once diminishing

returns set in (Answer A is incorrect) and themarginal productivity of inputs declines (Answer Bis incorrect). Average fixed costs decline over theentire range of output since (total fixed costs /number of units produced declines as the numberof units produced increase (Answer D isincorrect).

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Question 4

Which of the following offers the best explanation of thedifference between the law of diminishing returns anddecreasing returns to scale.

ABoth represent an onset of inefficiencies but thelaw of diminishing returns applies to the short run anddecreasing returns to scale applies to the long run.

BThe law of diminishing returns refers toinefficiencies due to changing the scale of productionand decreasing returns to scale refer to inefficienciesdue to using too many variable costs in combinationwith fixed costs.

CThe law of diminishing returns refers toefficiencies from increasing the scale of production anddecreasing returns to scale refers to inefficiencies fromreducing the scale of production.

DThe law of diminishing returns refers to aconsumer's reduced marginal utility from increasing thenumber of units consumed. Decreasing returns to scalerefers to lower consumer marginal utility from higher

levels of income.

Answer 4

Correct answer is A

Both the law of diminishing returns and decreasingreturns to scale are due to inefficiencies inproduction. The law of diminishing returns is dueinefficiencies and lower productivity caused byadding too many variable inputs to fixed amount of

inputs. The law of diminishing returns is relevantonly in the short run where some inputs are fixed.Decreasing returns to scale allows for changes inproduction capacity but diseconomies of scale setin to produce inefficiencies. Decreasing returns toscale is a long run phenomena where there are nofixed costs. Answer A matches this explanation ofthe differences in the law of diminishing returnsand decreasing returns to scale. Answer B has therelationships backward in terms of fixity of costs.

Answer C is incorrect because it allows forchanges in the scale of production in the short anin the long run. Answer D is incorrect because ituses consumer utility rather than production..

Question 5

Which of the following best explain increasing returns to scale?

AIn the long run, when a firm increases all factorsof production by 10% there is a 5% increase in output.

BIn the short run, when a firm increases the use ofvariable inputs by 5% there is an 8% increase in output.

CIn the long run, when a firm increases all factorsof production by 10% there is a 12% increase in output.

DIn the short run, when a firm increases the use ofvariable inputs by 5% there is a 3% increase in output.

Answer 5

Correct answer is C

Returns to scale only occur in the long run since achange in scale represents a change in fixed costs(Answers B and D are incorrect). Increasing returnsto scale results in efficiencies where economies ofscale allow for output to increase by a higherpercent than the percent increase in inputs.

Answer C is a long run increase in the percent of

output that is greater than the percent increase ofinputs, reflecting increasing returns to scale.

Question 6

Which of the following represents the expected order of returnsto scale as a firm expands production?

AIncreasing returns to scale, decreasing returns toscale, and constant returns to scale.

BDecreasing returns to scale, increasing returns toscale, and constant returns to scale.

CConstant returns to scale, increasing returns toscale, and decreasing returns to scale.

DIncreasing returns to scale, constant returns toscale, and decreasing returns to scale.

Answer 6

Correct answer is D

The long run average cost curve falls, reaches aflat segment, and then rises. This pattern isconsistent with increasing returns to scale(economies of scale and falling average costs),constant returns to scale (constant or flat averagecots, and finally decreasing returns to scale (rising

average costs due to diseconomies of scale). Thecorrect answer is D.

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Question 7

If marginal revenue is less than marginal cost the quantity soldis:

AAt a profit maximizing level.

BAt a level that is too low.

CAt a level that is too high.

DIt is impossible to tell whether the level of output istoo high or too low from the data given.

Answer 7

Correct answer is C

The optimal quantity to produce and sell occurswhere the marginal revenue of the last unit soldequals the marginal cost of the last unit produced.The marginal revenue curve falls as more output isproduced and sold. The marginal cost increases as

more output is produced and sold. If the marginalrevenue is below the marginal cost the level ofoutput must be too high, since we moved beyondthe optimal output and sales quantity. This makesanswer C correct.

Question 8

Which of the following represents the additional outputobtained from using one additional unit of a resource?

AMarginal Revenue

BMarginal Cost

CMarginal ProductDMarginal Revenue Product

Answer 8

Correct answer is C

Marginal revenue is the addition to total revenuefrom the sale of one additional unit of product(Answer A is incorrect). Marginal cost is the

addition to total cost from producing one more unitof product (Answer B is incorrect) The change intotal revenue from employing one more unit of aresource or input is the marginal revenue product(Answer D is incorrect). Marginal product is theadditional output obtained from employing oneadditional unit of a resource or input (Answer C iscorrect).

Question 9

The price of a high quality coal is $1,000 per unit. A cheapersubstitute for this coal only costs $500 per unit, but the

cheaper substitute is less productive. Which of the followingwould be required to justify using the higher quality coal?

AThe marginal product of the higher quality coalmust be larger than the marginal product of the cheapercoal by 500.

BThe marginal product of the higher quality coalmust be larger than the marginal product of the cheapercoal by 1000.

CThe marginal product of the higher quality coalmust be at least half as high as the marginal productivityof the cheaper coal substitute.

DThe marginal product of the higher quality coalmust be at least twice as high as the marginal product ofthe cheaper coal substitute.

Answer 9

Correct answer is D

The choice of which input to use is based onfinding the cheapest cost per unit to produce,everything else equal. In this case the ratio ofmarginal product of the input to the input pricemeasures the cost per unit. If we are to use thehigher quality coal, the higher quality coal just beat least twice as productive as the cheaper coal inorder to have ratio of the marginal productivity toinput price. Answer D is correct..

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Market Structure

Question 1

You have a plot of land that can be used for farming or fordeveloping a golf course. You are willing to sell the land for$400,000 in either case. A developer offers you $1,000,000 forthe land. What does the additional $600,000 represent in thiscase?

AEconomic Rent

BNormal Profit

CMarginal Revenue

DEquilibrium Price

Answer 1

Correct answer is A

When an input is purchased for a more than thenext highest bidder would pay, the difference in

the amounts offered is called an economic rent(answer A). A normal profit represents what it coststo keep entrepreneurial skills at work in theircurrent use. Marginal revenue is the addedrevenue generated from the sale of one more unitof product. The equilibrium price is a market priceset by supply and demand interaction.

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Performance Measures

Question 1

What is the appropriate measure of the total market value of allgoods and services produced with a country's resources (notnecessarily within its borders)?

AGross Domestic Product (GDP)

BGross National Product (GNP)

CNet Domestic Product

DNational Income

Answer 1

Correct answer is B

The GDP is the total market value of goods andservices produced within a country, but not

necessarily with the resources of that country. NetDomestic product is the GDP minus depreciation.National income is the net domestic product plusincome earned abroad minus indirect businesstaxes. B is the correct answer.

Question 2

Which of the following is the correct definition for GDP usingthe expenditure (input) approach?

Aconsumption plus investment plus governmentexpenditure plus net exports.

Bconsumption plus saving plus governmentspending minus net exports

Cwages plus interest plus rent plus profits plusdepreciation plus indirect business taxes.

Dwages plus interest plus rent plus profits minusdepreciation minus business taxes

Answer 2

Correct answer is A

B is incorrect because savings is used rather thaninvestment and net exports are subtracted ratherthan added. C is the output (income and cost)

approach rather than the input (expenditure)approach. D is an incorrect because it is the outputapproach and since depreciation and businesstaxes are subtracted rather than added. A providesthe correct definition of the income (expenditure)approach to GDP.

Question 3

Which of the following is the correct order of the four phases ofthe business cycle?

Apeak, recession, recovery, troughBpeak, recovery, trough, recession

Cpeak, recession, trough, recovery

Dpeak, trough, recession, recovery

Answer 3

Correct answer is C

From the peak (top performance) the economy

starts to decline (recession) and reaches a bottom(trough). From this trough the economy eventuallyimproves (recovery) and rises to another peak.

Question 4

Which price index is based on a comparison of the prices ofitems in a "typical" shopping cart to a base value?

AThe GDP Price Deflator

BThe Wholesale Price Index

CThe National Income Price IndexDThe Consumer Price Index

Answer 4

Correct answer is D

The GDP deflator uses a factor based on allproduction in the economy at prices used in theGDP calculation. The wholesale price index usesthe price of items in a typical cart of wholesalequantities to a base value. There is no NationalIncome Price Index. The correct answer is D.

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Question 5

Unemployment that occurs when unemployed laborers havemanufacturing skills but job openings are for laborers withservice skills.

AFrictional unemployment

BStructural unemployment

CCyclical unemploymentDFull employment

Answer 5

Correct answer is B

Frictional unemployment occurs when there is jobturnover. Cyclical unemployment occurs whenaggregate labor supply exceeds aggregate labordemand in a low point of the business cycle. Fullemployment occurs when all workers willing to

work at market wages are employed using theirskills. The correct answer is structuralunemployment.

Question 6

Which of the following describes the relationship betweeninflation and the unemployment rate?

AWhen the unemployment rate falls inflation falls.

BWhen the unemployment rate falls inflation risesat a decreasing rate.

CWhen the unemployment rate falls the inflation

rate increases at a constant rate.

DWhen the unemployment rate falls the inflationrate increases at an increasing rate.

Answer 6

Correct answer is D

The relationship between the unemployment rateand the inflation rate is called the Phillips curve. Asthe unemployment rate falls the inflation rateincreases at an increasing rate. This gives thePhillips curve a shape that is convex to the origin.

The slope gets steeper as unemployment falls andflatter as unemployment increases. The correctanswer is D.

Question 7

Which of the following measures the average change overtime in the selling prices received by domestic producers fortheir output?

AProducer price index

BThe US index of domestic production.

CThe inflation index for domestic production.DThe sales index for domestic output of durable

goods

Answer 7

Correct answer is A

According to the Department of Labor Statistics,the Producer Price Index (PPI) program measuresthe average change over time in the selling pricesreceived by domestic producers for their output.The prices included in the PPI are from the firstcommercial transaction for many products andsome services.

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Trade

Question 1

Country A can produce 10 units of Y or 20 units of X. CountryB can produce 30 units of Y or 90 units of X. Which of thefollowing must be true?

ACountry A has an absolute advantage in X and Y.BCountry A has a comparative advantage in Y and

Country B has a comparative advantage in X.

CConstant returns to scale, increasing returns toscale, and decreasing returns to scale.

DA fair term of trade between Country A andCountry B would be 1X for 4Y.

Answer 1

Correct answer is B

Absolute advantage occurs when a country canproduce more of everything. In this case Country B

has the absolute advantage. A comparativeadvantage occurs when a product can be producedcheaper. Country A can produce 1Y or 2X.Country B can produce 1Y or 3X. Y is cheaper inCountry A (it only cost 2X to produce rather than3X) and X is cheaper in Country B (it only cost 1/3Yrather than 1/2 Y). A fair term of trade would bebetween 2 and 3 Y for 1X. The correct answer is B.

Question 2

Which of the following represents a control strategy where acountry places a tax on imports?

AA quota.

BShift of consumer preference.

CA tariff.

DA substitution strategy.

Answer 2

Correct answer is C

Countries have several control strategies to createbarriers to free trade. A quota is a limit on thequantity of goods and services that can beimported. A shift of consumer preferencesencourages consumers to buy domestic products.The substitution strategy develops substitutegoods for imports. A tax on imports is a tariff. Theanswer is C.

Question 3

Everything else equal, what is the consequence of an increasein the $/euro rate?

AU.S. exports to Europe are now more expensive.

BEuropean exports to the U.S. are now lessexpensive.

CThe dollar has appreciated

DThe dollar has depreciated.

Answer 3

Correct answer is D

When the $/euro increases the euro is worth moreand the dollar is worth less. The dollar hasdepreciated. When the dollar is cheaper, U.S.exports to Europe are less expensive. Europeanexports to the U.S. in euros are now moreexpensive. The correct answer is D.

Question 4

Which of the following corresponds to interest and dividendsreceived by residents in the U.S. from investments in othercountries.

AA credit in the capital account

BA credit in the current account.

CA debit in the capital account.

DA debit in the current account.

Answer 4

Correct answer is B

Interest and dividends received in the U.S. from

investments abroad represents a credit. Interestand dividends represent income recorded in thecurrent account.

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Question 5

Which of the following is true about the International MonetaryFund (IMF)?

AIt prints money to be used by member countries.

BIt has a pool of currencies from which membercountries can borrow to meet short-term deficits inbalance of payments.

CIt serves as an investment resource for membercountries allowing them to make extremely high rates ofreturn on invested capital.

DIt allows deposits by member countries which arethen allocated each year as a way to reward countrieswhich have made the most progress economically.

Answer 5

Correct answer is B

According to its website, the IMF promotesinternational monetary cooperation and exchangerate stability, facilitates the balanced growth ofinternational trade, and provides resources to helpmembers in balance of payments difficulties or toassist with poverty reduction.

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Management1

Question 1

A limited liability company (LLC) is a form of business offeringlimited liability to its owners. Which of the following is correctregarding LLCs?

ALLCs are generally treated like corporations for taxpurposes.

BAn operating agreement is used to establish rulesgoverning the membership, management, operation anddistribution of income of the company.

CLLCs are organized under "articles ofincorporation.

DIn general, an LLC's income and deductions areattributed to one member while the remaining membershave no tax consequences.

Answer 1

Correct answer is B

A limited liability company (LLC) is a form ofbusiness offering limited liability to its owners who

are usually referred to as members. LLCs areorganized under "articles of organization, or "therules of organization" and are generally treated likepartnerships for tax purposes. An operatingagreement is used to establish rules governing themembership, management, operation anddistribution of income of the company, with incomeand deductions attributed to each member andreported on that member's tax return.

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General2

Question 1

A Limited Liability Company (LLC) is a relatively new businessstructure allowed by state statute. Which of the followingstatements regarding LLCs is not correct?

ALLCs are popular because, similar to acorporation, owners have limited personal liability for thedebts and actions of the LLC.

BLLCs are like a partnership, providingmanagement the benefit of pass-through taxation.

CSince most states do not restrict ownership,members may include individuals, corporations, otherLLCs and foreign entities.

DIn most states there a maximum of 10 members inan LLC.

Answer 1

Correct answer is D

A Limited Liability Company (LLC) is a relativelynew business structure allowed by state statute.

LLCs are popular because, similar to a corporation,owners have limited personal liability for the debtsand actions of the LLC. Other features of LLCs aremore like a partnership, providing managementflexibility and the benefit of pass-through taxation.Owners of an LLC are called members. Since moststates do not restrict ownership, members mayinclude individuals, corporations, other LLCs andforeign entities. There is no maximum number ofmembers. Most states also permit singlemember LLCs, those having only one owner.

Question 2

A few types of businesses generally cannot be LLCs. Theseinclude

Abanks and insurance companies

Bcharitable organizations

Cconstruction companies

Dtelevision and radio broadcasters

Answer 2

Correct answer is A

Only a few types of businesses generally cannotbe LLCs, such as banks and insurance companies.State requirements vary slightly and federal taxregulations impact this as well.

Question 3

The advantages of a Limited Liability Company include all ofthe following EXCEPT:

Alimited liability of members

Bunlimited life

Cprofits flow through to members as to avoiddouble taxation

Dflexible profit distribution

Answer 3

Correct answer is B

Like a corporation, owners of an LLC enjoy limitedliability. Profits pass through to members, thusavoiding double taxation (though an LLC can electto be taxed as a sole proprietor, partnership, Scorporation or C corporation). The economicbenefits of member interests can be separated andassigned, giving the assignee the profits (orlosses) similar to a partnership.

Question 4

One aspect of the Limited Liability Company (LLC) whichwould generally be considered advantageous is

Alimited life

Bability to go public

Cflexibility of management

Dlaws regarding LLCs vary from state to state

Answer 4

Correct answer is C

In general, members of an LLC can establishgovernance and protective provisions pursuant to acontract or operating agreement, givingmanagement greaster flexibility than a corporation.Corporations can continue forever, whereas anLLC may dissolve when a member dies or files forbankruptcy. Businesses which intend to go publicmay be better served by choosing the corporateform of business. And though it is a very minorfactor, laws governing LLCs vary from state tostate more so than corporation laws.

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LLC and corporation compared

Question 1

Limited Liability Companies, a relatively new form of businessin the United States, provide all of the following EXCEPT:

ALLCs can elect to be taxed like partnerships sothat only the individuals are taxed on profits.

BLLC permit management to shield personal assetsfrom business creditors.

CLLCs issue common stock which is freelytranferable.

DLLC have a limited life that varies from state tostate.

Answer 1

Correct answer is C

The LLC is a distinct entity from its owners. TheLLC form of business combines the corporate

advantages of limited liability with the partnershipadvantage of pass-through taxation. As a result,the LLC can elect to be taxed like partnerships -- atthe individual level only. This is an advantage overC corporations which are subject to double-taxation

once at the corporate level, and again at theindividual level when profits are distributed asdividends to the shareholders. Similar tocorporations, LLCs permit the shielding of personalassets from business creditors. LLCs have alimited life that varies from state to state and LLCsdo not issue stock.

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Members as agents (301) and authority via operating agreement

Question 1

Which if the following is a correct statement of the law withrespect to a Limited Liability Company (LLC)? I. A member isan agent of a limited liability company solely by reason of beinga member. II. In general, a members actual authority to act foran LLC will depend fundamentally on the operating agreement.

AI. only is correct.

BII. only is correct.

CNeither I. nor II. is correct.

DBoth I. and II. are correct.

Answer 1

Correct answer is B

Under section 301 of the Revised Uniform LimitedLiability Company Act, a member is not an agent of

a limited liability company solely by reason of beinga member. Comments contained in the Act statethat, in general, a members actual authority to actfor an LLC will depend "fundamentally on theoperating agreement" (which is generally in writing,but may be oral). General agency law is applicableas well.

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General3

Question 1

With regard to an LLLP (limited liability limited partnership)which of the following is correct? I. The LLLP form primarily isused to convert an existing limited partnership previouslycreated under state law. II. The general partner in an LLLP haslimited liability similar to the limited partners.

ANeither I nor II is correct.

BI only is correct.

CII only is correct.

DBoth I and II are correct.

Answer 1

Correct answer is D

An LLLP is a limited liability limited partnership or,more specifically, a limited partnership (LP) that

registers under state law so the general partner willhave limited liability, similar to the limited partners.The LLLP form primarily is used to convert anexisting limited partnership previously createdunder state law.

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Fictitious names

Question 1

Hallasz operates a lawn maintenance business. In addition tohimself, Hallasz employs one other supervisor, Liggan, who ispaid a regular salary in season, and has approximately 22regular and 12 part-time employees. Hallasz trades as GreenPastures Lawn Care Company. If Hallasz takes no furtheraction regarding the form of his business organization, GreenPasture Lawn Care Company will

Abe deemed a corporation.

Btreated as a general partnership,with Hallasz andLiggan as general partners.

Cbe considered a sole proprietorship.

Dnot be in violation of state filing requirements.

Answer 1

Correct answer is C

Since Hallasz and Liggan do not carry on thebusiness as co-owners (Liggan is paid a salary

rather than a share of profits) there is nopresumption of partnership. Since no formal filingshave been made, the business would not betreated as a corporation, a limited partnership, anLLC, or other entity requiring such formal filings.Hallasz will be treated as a sole proprietorship, butis in violation of common fictitious namestatutes for doing business under a fictitious namewithout filing with state authorities.

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Proprietorship - adding a partner

Question 1

Lewis, a sole proprietor doing business as Lewis Bait & TackleShop, added Tomms as an employee. Lewis paid Tomms aregular salary plus 10% of all profits. As a result

ALewis may deduct, as an expense, the salary paidto Tomms.

BLewis need NOT make matching FICA paymentsfor Tomms.

CLewis may NOT terminate Tomms without Tomm'sassent.

DLewis and Tomms have formed a partnership.

Answer 1

Correct answer is A

When a proprietorship or a partnership pays anemployee a percentage of profits as part of the

employee's compensation, this alone is notsufficient to change the employee's status to that ofa partner.

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Business Objective

Question 1

The goal of management in a corporation should be to

AMaximize profit

BMaximize EPSCMaximize their salary

DMaximize shareholder wealth

Answer 1

Correct answer is D

Attempting to maximize profit or EPS can lead toshort term decision making that may not be optimal

in the long run. Maximizing shareholder wealth isconsidered the same as maximizing share price.

Question 2

Which of the following is not considered a valid objective formanagement of a corporation to attempt to achieve?

AMaximize the cash flow to the organization

BMaximize shareholder wealth

CCre