Multiple Choice Questions (Enter your answers on the enclosed answer sheet) 1)   What type of business is the easiest to set up?
a.   a partnership b.   a sole proprietorship c.   a corporation d.   all types of business require the same amount of effort and expense.  
2)   Which type of business has the most government rules and regulations affecting it?
a.   a corporation b.   a partnership c.   a sole proprietorship d.   All types of business have the same set of rules and regulations. 
3)   Who controls a sole proprietorship?
a.   bondholders b.   the sole proprietor  c.   stockholders d.   All of above 
4)   Jeremy is thinking of starting up a small business selling NASCAR memorabilia.  He      is considering setting up his business as a sole proprietorship.  What is one advantage      to Jeremy of setting up his business as a sole proprietorship?
a.   As a sole proprietor, Jeremy would face limited liability. b.   As a sole proprietor, Jeremy would have both ownership and control over the business. c.   As a sole proprietor, Jeremy would have the ability to share risk with shareholders. d.   All of the above would be advantages of setting up his business as a sole proprietor      ship. 
5)   Which of the following is not an advantage of starting a new business as a corpora      tion?
a.   separation of ownership and business liability b.   ability to share risks c.    possibility of double taxation d.   enhanced ability to raise funds
6)   Who operates and controls a corporation in its day-to-day activities?
a.   the employees  b.   the board of directors c.   the corporation’s management d.   the stockholders

7)   What do economists call a situation where a hired manager does not have the same      interests as the owners of a business?
a.   a financial intermediary problem b.   the financial problem c.   conquest and control d.   a principal-agent problem  
8)   Which of the following does not take place in the direct finance market?
a.   Corporate bonds are sold to savers. b.   Deposits from savers are accumulated and loans made to borrowers. c.   Ownership in corporations is sold in the form of common stock. d.   Ownership in corporations is sold in the form of preferred stock. 
9)   If a corporation earns a profit, how do owners of the firm share in the profit?
a.   by raising the interest rate on bonds b.   dividend payments on shares of that firm’s stock c.   coupon payments on that firm’s bonds d.   by selling any bonds or stocks owned and realizing a capital gain 
10) If a corporation retains all its profits and distributes none of the profit to owners, how       can owners benefit?
a.   If the retained earnings are expected to create future profits, the market price of the      firm’s stock will increase and create a capital gain for stockholders if the stock is sold.  b.   Owners will only benefit if some profits are paid out in the form of dividends.  c.   Shares of stock can be converted into bonds so stockholders will be able to earn cou      pon payments. d.   The owners’ federal income tax liability is reduced by their share of the corporation’s      retained earnings.  
11) David Myers, former controller for WorldCom, pleaded guilty to falsely reported costs      for WorldCom that were ________ than they actually were, resulting in reported ac      counting profits for WorldCom that were ________ than their actual level.
a.   higher; higher b.   higher; lower c.   lower; lower d.   lower; higher
12) Most people would prefer to drive a luxury car that has all the options, but more      people buy less expensive cars even though they could afford the luxury car because

a.   car buyers are irrational. b.   the marginal utility per dollar spent on the less expensive car is higher than that spent     on luxury cars. c.   the total utility of less expensive cars is greater than that of luxury cars.  d.   luxury cars cost a lot more than non-luxury cars.
Table 6-2
Table 6-2 shows Keira’s utility from soup and sandwiches. The price of soup is $2 per cup and the price of a sandwich is $3. Keira has $18 to spend on these two goods.
13) Refer to Table 6-2.  What is Keira’s marginal utility per dollar spent on the third cup      of soup? 
a.   72 units of utility  b.   36 units of utility c.   6 units of utility d.   12 units of utility 
14) Firms pay famous individuals to endorse their products because
a.   the firms are irrational and are wasting advertising expenditures. b.   famous people obviously know what are the best goods and services. c.   famous people only consume high quality products.  d.   apparently demand is affected not just by the number of people who use a product      but also by the type of person that uses the product. 
15) If 20 units of a good are sold at a price of $50 and 30 units are sold at a price of      $40, what is the absolute value of the price elasticity of demand? Use the midpoint       formula.
a.   1. b.   0.56. c.   2.5 d.   1.8.

16) At a price of $100, Beachside Canoe Rentals rented 11 canoes. When it increased      its rental price to $125, 9 canoes were rented.  Calculate the absolute value of the      price elasticity of demand for canoe rentals, using the midpoint formula. 
a.   0.75 b.   0.9 c.   2 d.   1.25 
17) A demand curve that is horizontal indicates that the commodity
a.   is a necessity.  b.   must be very cheap. c.   has a large number of substitutes. d.   has few substitutes. 
18) With the increased usage of cell-phone services, what has happened to the price      elasticity of demand for land-line telephone services?
a.   It has become more elastic. b.   It has become more a luxury. c.   It has become unit-elastic.  d.   It has become more inelastic. 
19) Suppose the absolute value of the price elasticity of demand for meals at Fortune      Buffet House is ∞. What happens to sales revenue if the restaurant increases its price       by 5 percent?
a.   Sales revenue falls by less than 5 percent. b.   Sales revenue remains unchanged. c.   Sales revenue cannot be determined without information on prices. d.   Sales revenue falls to zero. 
20) A characteristic of the long run is
a.   plant capacity cannot be increased or decreased.  b.   all inputs can be varied. c.   there are both fixed and variable inputs d.   there are fixed inputs.

21) Refer to Figure 7-1.  The average product of the 4th worker 
a.   is 68. b.   is 11. c.   is 17. d.   cannot be determined.
22) Average total cost is equal to 
a.    total cost divided by the number of workers.  b.   marginal cost plus variable cost. c.   average fixed cost minus average variable cost. d.   total cost divided by the quantity of output produced. 
23) Adam spent $10,000 on new equipment for his small business, “Adam’s Fitness      Studio.”  Membership at his fitness center is very low and at this rate, Adam needs an      additional $12,000 per year to keep his studio open.  Which of the following is true?
a.   The variable cost of running the studio is $22,000.  b.   The fixed cost of running the studio is $22,000.  c.   The $10,000 Adam spent on equipment is the total cost of starting the business and       the $12,000 he’ll need to continue operations is a marginal cost. d.   The $10,000 Adam spent on equipment is a fixed cost of business and the $12,000      he’ll need to continue operations is a variable cost. 
24) Long run average cost curves are U-shaped because
a.   of the law of diminishing returns. b.   of the law of demand. c.   of economies and diseconomies of scale. d.   of the law of supply.

25) Manufacturers of flat-panel televisions expect continued rapid increases in the de      mand for their products. In response to this forecast, manufacturers are building       increasingly larger plants. At the same time, they expect to sell flat-panel televisions      at lower prices. Which of the following must be true if manufacturers plan to lower      prices and yet expect to cover the average cost of production in their larger plants? 
a.   They expect that the demand for flat-panels televisions is relatively elastic and there      fore lowering prices will lead to an increase in total revenue which will comfortably       cover the cost of production.  b.   The cost of building a larger plant must be lower than the cost of building smaller      plants. c.   They expect that economies of scale will make the cost of production in the larger       plants lower than the cost of production in the smaller plants. d.   Larger plants are more efficient than smaller plants because the bulk of the cost of      production is fixed costs.

Written Assignment for Unit Two
• Include your name, student number, course number, course title and unit number on each page of your written assignment (this is for your protection in case your materials become separated). • Begin each written assignment by identifying the question number you are answering followed by the actual question itself (in bold type). • Use a standard essay format for responses to all questions (i.e. an introduction, middle paragraphs and conclusion). • Responses must be submitted as a MS Word Document only, typed double-spaced, using a standard font (i.e. Times New Roman) and 12 point type size.
Word count is NOT one of the criteria that is used in assigning points to written assignments. However, students who are successful in earning the maximum number of points tend to submit written assignments that fall in the following ranges:
Undergraduate courses: 350 – 500 words or 1 – 2 pages. 
Plagiarism All work must be free of any form of plagiarism. Put written answers into your own words. Do not simply cut and paste your answers from the Internet and do not copy your answers from the textbook. Be sure to refer to the course Syllabus for more details on plagiarism and proper citation styles.
Please answer ONE of the following:
1)   Why might it be good for members of a corporation’s board of directors to own the      firm’s stock?
2)   A construction project in Congressman Foghorn’s district is unfinished. Foghorn has      asked that a new appropriations bill include funds to complete the project, despite a      report by an independent agency that the project is a waste of taxpayer money. Fog      horn’s project is a bridge that crosses a river between two cities in his district. The      press has criticized Foghorn and dubbed the project “a bridge too far” since another       bridge, located closer to the same two cities Foghorn’s bridge will connect, already      exists and can accommodate all traffic between the two cities. Foghorn argues that if      the bridge project is not completed, the $50 million already spent will have been      wasted. Is Foghorn’s argument economically rational? Explain your answer. 
3)   Behavioral economists examine choices that consumers make that are not economi      cally rational. Economists generally assume that people are rational; that is, they       weigh the benefits and costs of an action and choose an action only if the benefits      outweigh the costs. Why do consumers not act rationally when the result is that they       make themselves worse off?