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1. What is the difference between an “increase in demand” and an “increase in quantity demanded”? A) There is no difference between the two terms; they both refer to a shift of the demand curve. B) An “increase in demand” is represented by a rightward shift of the demand curve while an “increase in quantity demanded” is represented by a movement along a given demand curve. C) There is no difference between the two terms; they both refer to a movement downward along a given demand curve. D) An “increase in demand” is represented by a movement along a given demand curve, while an “increase in quantity demanded” is represented by a rightward shift of the demand curve. 2. If, in response to an increase in the price of chocolate, the quantity demanded of chocolate decreases economists would describe this as A) a decrease in demand. B) a decrease in quantity demanded. C) a change in consumer income. D) a decrease in consumers’ taste for chocolate. 3. By drawing a demand curve with ________ on the vertical axis and ________ on the horizontal axis, economists assume that the most important determinant of the demand for a good is the ________ of the good. A) quantity; price; quantity B) price; quantity; quantity C) price; quantity; price D) quantity; price; price 4. If a demand curve shifts to the right, then A) demand has increased. B) quantity demanded has increased. C) demand has decreased. D) quantity demanded has decreased. 5. Holding everything else constant, an increase in the price of MP3 players will result in A) a decrease in the quantity of MP3 players supplied. B) a decrease in the demand for MP3 players. C) an increase in the supply of MP3 players. D) a decrease in the quantity of MP3 players demanded. 6. A change in all of the following variables will change the market demand for a product except A) the price of the product. B) population and demographics. C) income. D) tastes. 7. Which of the following will shift the demand curve for a good? A) a change in the technology used to produce the good B) an increase in the price of the good C) a decrease in the price of a complementary good D) a decrease in the price of the good 8. A movement along the demand curve for toothpaste would be caused by A) a change in the price of toothbrushes. B) a change in consumer income. C) a change in the price of toothpaste. D) a change in population. 9. The ________ effect refers to the change in quantity demanded for a good that results from the effect of a change in the good’s price on consumer’s purchasing power. A) ceteris paribus B) population C) substitution D) income 10. If an increase in income leads to in an increase in the demand for peanut butter, then peanut butter is A) a neutral good. B) a normal good. C) a necessity. D) a complement. 11. If an increase in income leads to a decrease in the demand for popcorn, then popcorn is A) an inferior good. B) a neutral good. C) a necessity. D) a normal good. Figure 3-1 12. Refer to Figure 3-1. An increase in population would be represented by a movement from A) A to B. B) B to A. C) D1 to D2. D) D2 to D1. 13. Refer to Figure 3-1. A decrease in taste or preference would be represented by a movement from A) A to B. B) B to A. C) D1 to D2. D) D2 to D1. 14. Refer to Figure 3-1. If the product represented is an inferior good, an increase in income would be represented by a movement from A) A to B. B) B to A. C) D1 to D2. D) D2 to D1. 15. Refer to Figure 3-1. A decrease in the price of the product would be represented by a movement from A) A to B. B) B to A. C) D1 to D2. D) D2 to D1. 16. Elvira decreased her consumption of bananas when the price of peanut butter increased. For Elvira, peanut butter and bananas are A) substitutes in consumption. B) both inferior goods. C) complements in consumption. D) both luxury goods. 17. Suppose that when the price of raspberries increases, Lonnie increases his purchases of papayas. To Lonnie, A) raspberries and papayas are complements. B) raspberries and papayas are inferior goods. C) raspberries and papayas are normal goods. D) raspberries and papayas are substitutes. 18. In January, buyers of gold expect that the price of gold will rise in February. What happens in the gold market in January, holding all else constant? A) The supply curve shifts to the right. B) The demand curve shifts to the left. C) The demand curve shifts to the right. D) The quantity demanded increases. 19. Chips and salsa are complements. If the price of salsa decreases, the demand for chips will increase. A) TRUE B) FALSE 20. A normal good is a good for which the demanded increases as income decreases, holding everything else constant. A) TRUE B) FALSE 21. If in the market for peaches, the supply curve has shifted to the left, A) the supply of peaches has increased. B) the supply of peaches has decreased. C) the quantity of peaches supplied has increased. D) the quantity of peaches supplied has decreased. 22. What is the difference between an “increase in supply” and an “increase in quantity supplied”? A) There is no difference between the two terms; they both refer to a shift of the supply curve. B) There is no difference between the two terms; they both refer to a movement along a given supply curve. C) An “increase in supply” means the supply curve has shifted to the right while an “increase in quantity supplied” means at any given price supply has increased. D) An “increase in supply” means the supply curve has shifted to the right while an “increase in quantity supplied” refers to a movement along a given supply curve in response to an increase in price. Figure 3-2 23. Refer to Figure 3-2. An increase in price of inputs would be represented by a movement from A) A to B. B) B to A. C) S1 to S2. D) S2 to S1. 24. Refer to Figure 3-2. An increase in the number of firms in the market would be represented by a movement from A) A to B. B) B to A. C) S1 to S2. D) S2 to S1. 25. Refer to Figure 3-2. An increase in the price of substitutes in production would be represented by a movement from A) A to B. B) B to A. C) S1 to S2. D) S2 to S1. 26. Refer to Figure 3-2. A decrease in the price of the product would be represented by a movement from A) A to B. B) B to A. C) S1 to S2. D) S2 to S1. 27. ) If a firm expects that the price of its product will be higher in the future than it is today A) the firm will go out of business. B) the firm has an incentive to increase supply now and decrease supply in the future. C) the firm has an incentive to decrease quantity supplied now and increase quantity supplied in the future. D) the firm has an incentive to decrease supply now and increase supply in the future. 28. A decrease in the price of GPS systems will result in A) a smaller quantity of GPS systems supplied. B) a larger quantity of GPS systems supplied. C) a decrease in the demand for GPS systems. D) an increase in the supply of GPS systems. 29. A change in supply is represented by a shift of the supply curve. A) TRUE B) FALSE 30. An increase in the quantity of a product supplied is caused by an increase in the price of the product. A) TRUE B) FALSE 31. Which of the following is the correct way to describe equilibrium in a market? A) At equilibrium, demand equals supply. B) At equilibrium, quantity demanded equals quantity supplied. C) At equilibrium, market forces no longer apply. D) At equilibrium, scarcity is eliminated. Figure 3-5 32. Refer to Figure 3-5. At a price of $15, A) there would be a surplus of 4 units. B) there would be a shortage of 2 units. C) there would be a surplus of 6 units. D) there would be a shortage of 4 units. 33. Refer to Figure 3-5. At a price of $5, the quantity sold A) is 2 units. B) is 4 units. C) is 6 units. D) cannot be determined. 34. Refer to Figure 3-5. In a free market such as that depicted above, a surplus is eliminated by A) a price increase, increasing the supply and decreasing the demand. B) a price decrease, decreasing the supply and increasing the demand. C) a price decrease, decreasing the quantity supplied and increasing the quantity demanded. D) a price increase, increasing the quantity supplied and decreasing the quantity demanded. 35. A successful marketing campaign will increase the demand for Red Bull. This will ________ the equilibrium price and ________ the equilibrium quantity of Red Bull. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease 36.To affect the market outcome, a price ceiling A) must be set below the black market price. B) must be set below the legal price. C) must be set below the price floor. D) must be set below the equilibrium price. 37. The minimum wage is an example of a price ceiling. A) TRUE B) FALSE 38. Suppose a price floor on sparkling wine is proposed by the Health Minister of the country of Vinyardia. What will be the likely effect on the market for sparkling wine in Vinyardia? A) Quantity demanded will decrease, quantity supplied will increase, and a surplus will result. B) Quantity demanded will increase, quantity supplied will decrease, and a surplus will result. C) Quantity demanded will decrease, quantity supplied will increase, and a shortage will result. D) Quantity demanded will increase, quantity supplied will decrease, and a shortage will result. 39. In the economic sense, almost everything is scarce. ________ of a good or service occurs when the quantity demanded is greater than the quantity supplied at the current market price. A) Scarcity B) A shortage C) A surplus D) An overstock 40. Rent control is an example of A) a subsidy for low-skilled workers. B) a price floor. C) a price ceiling. D) a black market. 41. A sole proprietorship is A) the easiest type of business to set up. B) the most difficult type of business to set up. C) the most expensive type of business to set up. D) the least profitable type of business to set up. 42.Which type of business is the most difficult to set up? A) sole proprietorship B) partnership C) corporation D) There is no difference in the difficulty of establishment. 43. A corporation is the type of business has ________ government rules and regulations affecting it. A) no B) the fewest C) the most D) only federal 44. How do a sole proprietorship and a corporation differ? A) Proprietorships have unlimited liability while corporations have limited liability. B) Corporations can issue stocks and bonds, while proprietorships cannot. C) Corporations face more taxes than do proprietorships. D) All of these are differences between the two types of businesses. 45. Assume you set up a sole proprietorship and your lawyer tells you that as the owner, you could stand to lose your personal wealth if the business goes bankrupt. This means a sole proprietorship A) faces limited liability. B) faces unlimited liability. C) has little chance of succeeding. D) is not a good type of business to set up. 46. Who controls a sole proprietorship? A) stockholders B) bondholders C) the owner D) all of these 47. Eighty-five percent of all firms employ ________ workers. A) only one or two B) fewer than 20 C) 50 or more D) over 100 48. Which of the following is an advantage of starting a new business as a proprietorship? A) The owner has limited personal liability. B) A proprietorship has few government rules and regulations to comply with. C) Business profits are not taxed. D) A proprietorship can easily attain additional funding. 49. Which of the following is not an advantage of starting a new business as a corporation? A) separation of ownership and business liability B) enhanced ability to raise funds C) ability to share risks D) possibility of double taxation 50. How are corporate profits taxed in the United States? A) Earnings are taxed first by state sales taxes and then as corporate profits at the Federal level. B) Earnings are taxed first as personal income then as corporate profits at the Federal level. C) Earnings are taxed first as corporate profits then as personal income after dividends are paid. D) Corporate profits are not taxed at all. 51. Which type of businesses earns the majority of profits in the United States? A) corporations B) partnerships C) sole proprietorships D) none of these 52. What is an inside director? A) a movie director who also appears in the movie B) a member of a corporate board of directors that is also a manager of the business C) the CEO that is selected by the corporation’s board of directors D) a board of director chair who has been in the job for at least three years Topic: Corporate Structure 53. A corporation’s board of directors A) hire the managers of the corporation. B) control the day-to-day activities of the corporation. C) are personally liable for the debts of the corporation. D) are the sole owners of the corporation. 54. What do economists call the situation where a hired manager does not have the same interests as the owners of the business? A) conquest and control B) a financial problem C) a principal-agent problem D) a financial intermediary problem 55. Corporations are legally owned by their shareholders. A) TRUE B) FALSE 56. How can a proprietorship or partnership raise funds for expansion? A) borrow from someone or an institution willing to lend the funds B) reinvest profit back into the business C) take on a partner or more partners D) Any of these would generate funds for expansion. 57. What takes place in the indirect finance market? A) Part ownership of corporations is sold in the form of stocks. B) Corporate and government bonds are sold to savers. C) Deposits of savers are accepted and loans made to borrowers. D) Government purchases of buildings and equipment are sold to the highest bidder. 58. Which of the following takes place in the direct finance market? A) Firms borrow funds from banks. B) Deposits from savers are accumulated and loans made to borrowers. C) Ownership in corporations is sold in the form of preferred stock. D) Banks offer savings accounts to customers. 59. A bond is a financial security that represents A) ownership in a corporation. B) the portion of profits paid to shareholders. C) the interest rate paid on a share of stock. D) a promise to repay a fixed amount of funds. 60. What is different about buying stocks and buying bonds? A) A stock can possibly pay dividends forever, but bonds have a fixed number of payments. B) Differences of opinion about a stock’s future may vary considerably but there is less difference about a bond’s future. C) The future growth of a stock is more uncertain than the payments of a bond. D) All these are differences between stocks and bonds. 61. Which of the following is a characteristic of stock? A) Stock represents a promise to repay a fixed amount of funds. B) The face value or principal plus interest is repaid at a specified period of time. C) The length of coupon payments is fixed by the stated maturity period. D) Stock represents ownership in a firm 62. Payments by a corporation to its shareholders are known as A) stocks. B) bonds. C) coupons. D) dividends. 63. If a corporate bond with a face value of $5,000 pays yearly coupon payments of $100, what is the coupon rate? A) 2% B) 5% C) 10% D) 20% 64. What happens in the secondary market? A) secondary inputs like electricity are sold B) a corporate financial manager will raise funds for expansion of the firm C) newly issued claims are sold by the borrowing firm to the initial buyer D) already issued claims are sold from one investor to another 65. One of the most widely followed stock indexes in the United States is the Dow Jones Industrial Average. This index represents A) the stock prices of 500 large U.S. firms. B) an over-the-counter market. C) the stock prices of more than 4,000 U.S. firms. D) the stock prices of 30 large U.S. corporations. 66. When the coupon rate on newly issued bonds decreases relative to older, outstanding bonds, what happens? A) The market price of the older bond falls in the secondary market. B) The market price of the older bond rises in the secondary market. C) Older bonds can still be sold at their face value. D) Older bonds will sell for more than their face value. 67. A nonmonetary opportunity cost is called a(n) ________, while a cost that involves spending money is called a(n) ________. A) accounting cost; explicit cost B) implicit cost; explicit cost C) accounting profit; economic profit D) normal rate of return; asset 68. What is accounting profit? A) gross revenue minus explicit costs B) gross revenue minus implicit costs C) gross revenue minus explicit and implicit costs D) the same as economic profit 69. What is shown on a firm’s income statement? A) costs B) profits C) revenues D) All of these are shown on a firm’s income statement. 70. In response to accounting scandals in 2002, the federal government passed legislation requiring that corporate directors have a certain level of expertise with financial information and mandating that chief executive officers personally certify the accuracy of financial statements. What is the name of this legislation? A) the Accountant Reliability Act B) the 24th amendment to the Constitution C) the Kennedy-Lott Act D) the Sarbanes-Oxley Act

1. What is the difference between an “increase in demand” and an “increase in quantity demanded”?
A) There is no difference between the two terms; they both refer to a shift of the demand curve.
B) An “increase in demand” is represented by a rightward shift of the demand curve while an “increase in quantity demanded” is represented by a movement along a given demand curve.
C) There is no difference between the two terms; they both refer to a movement downward along a given demand curve.
D) An “increase in demand” is represented by a movement along a given demand curve, while an “increase in quantity demanded” is represented by a rightward shift of the demand curve.

2. If, in response to an increase in the price of chocolate, the quantity demanded of chocolate decreases economists would describe this as
A) a decrease in demand.
B) a decrease in quantity demanded.
C) a change in consumer income.
D) a decrease in consumers’ taste for chocolate.

3. By drawing a demand curve with ________ on the vertical axis and ________ on the horizontal axis, economists assume that the most important determinant of the demand for a good is the ________ of the good.
A) quantity; price; quantity
B) price; quantity; quantity
C) price; quantity; price
D) quantity; price; price

4. If a demand curve shifts to the right, then
A) demand has increased.
B) quantity demanded has increased.
C) demand has decreased.
D) quantity demanded has decreased.

5. Holding everything else constant, an increase in the price of MP3 players will result in
A) a decrease in the quantity of MP3 players supplied.
B) a decrease in the demand for MP3 players.
C) an increase in the supply of MP3 players.
D) a decrease in the quantity of MP3 players demanded.

6. A change in all of the following variables will change the market demand for a product except
A) the price of the product.
B) population and demographics.
C) income.
D) tastes.

7. Which of the following will shift the demand curve for a good?
A) a change in the technology used to produce the good
B) an increase in the price of the good
C) a decrease in the price of a complementary good
D) a decrease in the price of the good

8. A movement along the demand curve for toothpaste would be caused by
A) a change in the price of toothbrushes.
B) a change in consumer income.
C) a change in the price of toothpaste.
D) a change in population.

9. The ________ effect refers to the change in quantity demanded for a good that results from the effect of a change in the good’s price on consumer’s purchasing power.
A) ceteris paribus
B) population
C) substitution
D) income

10. If an increase in income leads to in an increase in the demand for peanut butter, then peanut butter is
A) a neutral good.
B) a normal good.
C) a necessity.
D) a complement.

11. If an increase in income leads to a decrease in the demand for popcorn, then popcorn is
A) an inferior good.
B) a neutral good.
C) a necessity.
D) a normal good.

Figure 3-1

12. Refer to Figure 3-1. An increase in population would be represented by a movement from
A) A to B.
B) B to A.
C) D1 to D2.
D) D2 to D1.

13. Refer to Figure 3-1. A decrease in taste or preference would be represented by a movement from
A) A to B.
B) B to A.
C) D1 to D2.
D) D2 to D1.

14. Refer to Figure 3-1. If the product represented is an inferior good, an increase in income would be represented by a movement from
A) A to B.
B) B to A.
C) D1 to D2.
D) D2 to D1.

15. Refer to Figure 3-1. A decrease in the price of the product would be represented by a movement from
A) A to B.
B) B to A.
C) D1 to D2.
D) D2 to D1.

16. Elvira decreased her consumption of bananas when the price of peanut butter increased. For Elvira, peanut butter and bananas are
A) substitutes in consumption.
B) both inferior goods.
C) complements in consumption.
D) both luxury goods.

17. Suppose that when the price of raspberries increases, Lonnie increases his purchases of papayas. To Lonnie,
A) raspberries and papayas are complements.
B) raspberries and papayas are inferior goods.
C) raspberries and papayas are normal goods.
D) raspberries and papayas are substitutes.

18. In January, buyers of gold expect that the price of gold will rise in February. What happens in the gold market in January, holding all else constant?
A) The supply curve shifts to the right.
B) The demand curve shifts to the left.
C) The demand curve shifts to the right.
D) The quantity demanded increases.
19. Chips and salsa are complements. If the price of salsa decreases, the demand for chips will increase.
A) TRUE B) FALSE

20. A normal good is a good for which the demanded increases as income decreases, holding everything else constant.
A) TRUE B) FALSE

21. If in the market for peaches, the supply curve has shifted to the left,
A) the supply of peaches has increased.
B) the supply of peaches has decreased.
C) the quantity of peaches supplied has increased.
D) the quantity of peaches supplied has decreased.

22. What is the difference between an “increase in supply” and an “increase in quantity supplied”?
A) There is no difference between the two terms; they both refer to a shift of the supply curve.
B) There is no difference between the two terms; they both refer to a movement along a given supply curve.
C) An “increase in supply” means the supply curve has shifted to the right while an “increase in quantity supplied” means at any given price supply has increased.
D) An “increase in supply” means the supply curve has shifted to the right while an “increase in quantity supplied” refers to a movement along a given supply curve in response to an increase in price.

Figure 3-2

23. Refer to Figure 3-2. An increase in price of inputs would be represented by a movement from
A) A to B.
B) B to A.
C) S1 to S2.
D) S2 to S1.

24. Refer to Figure 3-2. An increase in the number of firms in the market would be represented by a movement from
A) A to B.
B) B to A.
C) S1 to S2.
D) S2 to S1.

25. Refer to Figure 3-2. An increase in the price of substitutes in production would be represented by a movement from
A) A to B.
B) B to A.
C) S1 to S2.
D) S2 to S1.

26. Refer to Figure 3-2. A decrease in the price of the product would be represented by a movement from
A) A to B.
B) B to A.
C) S1 to S2.
D) S2 to S1.

27. ) If a firm expects that the price of its product will be higher in the future than it is today
A) the firm will go out of business.
B) the firm has an incentive to increase supply now and decrease supply in the future.
C) the firm has an incentive to decrease quantity supplied now and increase quantity supplied in the future.
D) the firm has an incentive to decrease supply now and increase supply in the future.

28. A decrease in the price of GPS systems will result in
A) a smaller quantity of GPS systems supplied.
B) a larger quantity of GPS systems supplied.
C) a decrease in the demand for GPS systems.
D) an increase in the supply of GPS systems.

29. A change in supply is represented by a shift of the supply curve.
A) TRUE B) FALSE

30. An increase in the quantity of a product supplied is caused by an increase in the price of the product.
A) TRUE B) FALSE

31. Which of the following is the correct way to describe equilibrium in a market?
A) At equilibrium, demand equals supply.
B) At equilibrium, quantity demanded equals quantity supplied.
C) At equilibrium, market forces no longer apply.
D) At equilibrium, scarcity is eliminated.

Figure 3-5

32. Refer to Figure 3-5. At a price of $15,
A) there would be a surplus of 4 units.
B) there would be a shortage of 2 units.
C) there would be a surplus of 6 units.
D) there would be a shortage of 4 units.

33. Refer to Figure 3-5. At a price of $5, the quantity sold
A) is 2 units.
B) is 4 units.
C) is 6 units.
D) cannot be determined.

34. Refer to Figure 3-5. In a free market such as that depicted above, a surplus is eliminated by
A) a price increase, increasing the supply and decreasing the demand.
B) a price decrease, decreasing the supply and increasing the demand.
C) a price decrease, decreasing the quantity supplied and increasing the quantity demanded.
D) a price increase, increasing the quantity supplied and decreasing the quantity demanded.

35. A successful marketing campaign will increase the demand for Red Bull. This will ________ the equilibrium price and ________ the equilibrium quantity of Red Bull.
A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease

36.To affect the market outcome, a price ceiling
A) must be set below the black market price.
B) must be set below the legal price.
C) must be set below the price floor.
D) must be set below the equilibrium price.

37. The minimum wage is an example of a price ceiling.
A) TRUE B) FALSE

38. Suppose a price floor on sparkling wine is proposed by the Health Minister of the country of Vinyardia. What will be the likely effect on the market for sparkling wine in Vinyardia?
A) Quantity demanded will decrease, quantity supplied will increase, and a surplus will result.
B) Quantity demanded will increase, quantity supplied will decrease, and a surplus will result.
C) Quantity demanded will decrease, quantity supplied will increase, and a shortage will result.
D) Quantity demanded will increase, quantity supplied will decrease, and a shortage will result.

39. In the economic sense, almost everything is scarce. ________ of a good or service occurs when the quantity demanded is greater than the quantity supplied at the current market price.
A) Scarcity
B) A shortage
C) A surplus
D) An overstock

40. Rent control is an example of
A) a subsidy for low-skilled workers.
B) a price floor.
C) a price ceiling.
D) a black market.

41. A sole proprietorship is
A) the easiest type of business to set up.
B) the most difficult type of business to set up.
C) the most expensive type of business to set up.
D) the least profitable type of business to set up.

42.Which type of business is the most difficult to set up?
A) sole proprietorship
B) partnership
C) corporation
D) There is no difference in the difficulty of establishment.

43. A corporation is the type of business has ________ government rules and regulations affecting it.
A) no
B) the fewest
C) the most
D) only federal

44. How do a sole proprietorship and a corporation differ?
A) Proprietorships have unlimited liability while corporations have limited liability.
B) Corporations can issue stocks and bonds, while proprietorships cannot.
C) Corporations face more taxes than do proprietorships.
D) All of these are differences between the two types of businesses.

45. Assume you set up a sole proprietorship and your lawyer tells you that as the owner, you could stand to lose your personal wealth if the business goes bankrupt. This means a sole proprietorship
A) faces limited liability.
B) faces unlimited liability.
C) has little chance of succeeding.
D) is not a good type of business to set up.

46. Who controls a sole proprietorship?
A) stockholders
B) bondholders
C) the owner
D) all of these

47. Eighty-five percent of all firms employ ________ workers.
A) only one or two
B) fewer than 20
C) 50 or more
D) over 100

48. Which of the following is an advantage of starting a new business as a proprietorship?
A) The owner has limited personal liability.
B) A proprietorship has few government rules and regulations to comply with.
C) Business profits are not taxed.
D) A proprietorship can easily attain additional funding.

49. Which of the following is not an advantage of starting a new business as a corporation?
A) separation of ownership and business liability
B) enhanced ability to raise funds
C) ability to share risks
D) possibility of double taxation

50. How are corporate profits taxed in the United States?
A) Earnings are taxed first by state sales taxes and then as corporate profits at the Federal level.
B) Earnings are taxed first as personal income then as corporate profits at the Federal level.
C) Earnings are taxed first as corporate profits then as personal income after dividends are paid.
D) Corporate profits are not taxed at all.

51. Which type of businesses earns the majority of profits in the United States?
A) corporations
B) partnerships
C) sole proprietorships
D) none of these

52. What is an inside director?
A) a movie director who also appears in the movie
B) a member of a corporate board of directors that is also a manager of the business
C) the CEO that is selected by the corporation’s board of directors
D) a board of director chair who has been in the job for at least three years

Topic: Corporate Structure
53. A corporation’s board of directors
A) hire the managers of the corporation.
B) control the day-to-day activities of the corporation.
C) are personally liable for the debts of the corporation.
D) are the sole owners of the corporation.

54. What do economists call the situation where a hired manager does not have the same interests as the owners of the business?
A) conquest and control
B) a financial problem
C) a principal-agent problem
D) a financial intermediary problem

55. Corporations are legally owned by their shareholders.
A) TRUE B) FALSE

56. How can a proprietorship or partnership raise funds for expansion?
A) borrow from someone or an institution willing to lend the funds
B) reinvest profit back into the business
C) take on a partner or more partners
D) Any of these would generate funds for expansion.

57. What takes place in the indirect finance market?
A) Part ownership of corporations is sold in the form of stocks.
B) Corporate and government bonds are sold to savers.
C) Deposits of savers are accepted and loans made to borrowers.
D) Government purchases of buildings and equipment are sold to the highest bidder.

58. Which of the following takes place in the direct finance market?
A) Firms borrow funds from banks.
B) Deposits from savers are accumulated and loans made to borrowers.
C) Ownership in corporations is sold in the form of preferred stock.
D) Banks offer savings accounts to customers.

59. A bond is a financial security that represents
A) ownership in a corporation.
B) the portion of profits paid to shareholders.
C) the interest rate paid on a share of stock.
D) a promise to repay a fixed amount of funds.

60. What is different about buying stocks and buying bonds?
A) A stock can possibly pay dividends forever, but bonds have a fixed number of payments.
B) Differences of opinion about a stock’s future may vary considerably but there is less difference about a bond’s future.
C) The future growth of a stock is more uncertain than the payments of a bond.
D) All these are differences between stocks and bonds.

61. Which of the following is a characteristic of stock?
A) Stock represents a promise to repay a fixed amount of funds.
B) The face value or principal plus interest is repaid at a specified period of time.
C) The length of coupon payments is fixed by the stated maturity period.
D) Stock represents ownership in a firm

62. Payments by a corporation to its shareholders are known as
A) stocks.
B) bonds.
C) coupons.
D) dividends.

63. If a corporate bond with a face value of $5,000 pays yearly coupon payments of $100, what is the coupon rate?
A) 2%
B) 5%
C) 10%
D) 20%

64. What happens in the secondary market?
A) secondary inputs like electricity are sold
B) a corporate financial manager will raise funds for expansion of the firm
C) newly issued claims are sold by the borrowing firm to the initial buyer
D) already issued claims are sold from one investor to another

65. One of the most widely followed stock indexes in the United States is the Dow Jones Industrial Average. This index represents
A) the stock prices of 500 large U.S. firms.
B) an over-the-counter market.
C) the stock prices of more than 4,000 U.S. firms.
D) the stock prices of 30 large U.S. corporations.

66. When the coupon rate on newly issued bonds decreases relative to older, outstanding bonds, what happens?
A) The market price of the older bond falls in the secondary market.
B) The market price of the older bond rises in the secondary market.
C) Older bonds can still be sold at their face value.
D) Older bonds will sell for more than their face value.

67. A nonmonetary opportunity cost is called a(n) ________, while a cost that involves spending money is called a(n) ________.
A) accounting cost; explicit cost
B) implicit cost; explicit cost
C) accounting profit; economic profit
D) normal rate of return; asset

68. What is accounting profit?
A) gross revenue minus explicit costs
B) gross revenue minus implicit costs
C) gross revenue minus explicit and implicit costs
D) the same as economic profit

69. What is shown on a firm’s income statement?
A) costs
B) profits
C) revenues
D) All of these are shown on a firm’s income statement.

70. In response to accounting scandals in 2002, the federal government passed legislation requiring that corporate directors have a certain level of expertise with financial information and mandating that chief executive officers personally certify the accuracy of financial statements. What is the name of this legislation?
A) the Accountant Reliability Act
B) the 24th amendment to the Constitution
C) the Kennedy-Lott Act
D) the Sarbanes-Oxley Act

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