C h a p t e r

10 ORGANIZING
PRODUCTION

165
166 CHAPTER 4

 The Firm and Its Economic Problem Topic: Opportunity Cost

Skill: Recognition
Topic: The Firm's Goal 6) To make the best predictions about the
Skill: Recognition
decisions made by a firm, we should take
1) The most important goal of the firm is to account of a firm’s
A) maximize its revenues. A) accounting costs.
B) maximize its sales volume. B) explicit costs.
C) maximize its profits. C) opportunity costs.
D) minimize its costs. D) implicit costs.
Answer: C
Answer: C
Topic: The Firm's Goal
Topic: Opportunity Cost
Skill: Recognition
Skill: Analytical
2) Profit maximization 7) Typically a firm’s opportunity costs are
A) causes a firm to become as large as possible. A) only its explicit costs.
B) causes a firm to remain small in the long run. B) only its implicit costs.
C) increases the likelihood that a firm will C) the sum of its explicit costs and its implicit
survive. costs.
D) causes a firm to become the target of a D) neither its explicit costs nor its implicit costs.
takeover. Answer: C
Answer: C
Topic: Opportunity Cost
Topic: The Firm's Goal Skill: Analytical
Skill: Analytical
8) Opportunity costs include
3) Firms use incentives to pursue their most
A) both implicit costs and explicit costs.
fundamental goal, which is to maximize
B) implicit costs but not explicit costs.
A) profits. C) explicit costs but not implicit costs.
B) sales revenue. D) neither explicit costs nor implicit costs.
C) worker satisfaction. Answer: A
D) worker pay.
Answer: A Topic: Opportunity Cost
Skill: Analytical
Topic: The Firm's Goal 9) A firm’s opportunity cost of producing a good
Skill: Recognition
equals the
4) The fundamental objective of a firm is
A) explicit cost.
A) making a quality product. B) implicit cost.
B) increasing market share. C) explicit cost minus the implicit cost.
C) achieving employee satisfaction. D) explicit cost plus the implicit cost.
D) maximizing profits. Answer: D
Answer: D
Topic: Explicit Costs
Topic: The Firm's Goal Skill: Analytical
Skill: Recognition
10) The costs of a firm that are paid directly in
5) Firms that survive in the long run are usually money are called its
those that
A) explicit costs.
A) become as large as possible. B) implicit costs.
B) remain small. C) money opportunity costs.
C) use more capital rather than more labor. D) alternative costs.
D) strive for the largest possible profit. Answer: A
Answer: D
ORGANIZING PRODUCTION 167

Topic: Implicit Costs Topic: Implicit Costs

Skill: Recognition Skill: Conceptual
11) An implicit cost is an opportunity cost that 16) The difference between the price of a new car
A) requires no actual payment of cash. used by a firm and the price of the same car
B) is adjusted for the rate of inflation. one year later is known as
C) is measured by the amount of cash the firm A) economic depreciation.
actually pays out. B) physical depreciation.
D) is actually part of the firm’s normal profit. C) economic deterioration.
Answer: A D) physical deterioration.
Answer: A
Topic: Implicit Costs
Skill: Conceptual Topic: Implicit Costs
12) Most typically, a firm incurs an implicit cost Skill: Conceptual
when it 17) An electrician quits her current job, which pays
A) uses labor. $40,000 per year. She can take a job with
B) pays for its utilities, such as electric power. another firm for $45,000 per year or work for
C) uses its capital equipment. herself. The opportunity cost of working for
D) pays interest on a loan to a bank. herself is
Answer: C A) $5,000.
B) $40,000.
Topic: Implicit Costs
C) $45,000.
Skill: Recognition
13) An implicit rental rate is D) $85,000.
Answer: C
A) an accounting cost.
B) an explicit cost. Topic: Normal Profit
C) an opportunity cost. Skill: Recognition
D) a cost that is irrelevant to the business. 18) The average return for supplying
Answer: C entrepreneurial ability is the firm’s
A) accounting profit.
Topic: Implicit Costs
B) normal profit.
Skill: Conceptual
14) The implicit rental rate is the C) explicit profit.
D) actual profit.
A) total value of a piece of capital equipment. Answer: B
B) rental income forgone by not renting a piece
of capital equipment to someone else. Topic: Economic Profit
C) depreciation on a piece of capital equipment. Skill: Recognition
D) amount paid for the use of a piece of capital 19) Economic profit is the difference between total
equipment owned by someone else. revenue and
Answer: B A) implicit costs of production.
B) interest costs of production.
Topic: Implicit Costs
C) opportunity costs of production.
Skill: Conceptual
15) Over a given period, economic depreciation is D) explicit costs of production.
Answer: C
the change in capital equipment’s
A) output.
B) market value.
C) rate of return.
D) cost of maintenance.
Answer: B
168 CHAPTER 10

Topic: Economic Profit  Technology and Economic Efficiency

Skill: Recognition
20) A firm’s economic profit is its total revenue Topic: Technological and Economic Efficiency
Skill: Conceptual
minus its
24) A firm that is maximizing its profits
A) explicit costs.
A) is economically efficient and technologically
B) implicit costs.
efficient.
C) opportunity costs.
B) is economically efficient but may not be
D) normal profit.
Answer: C technologically efficient.
C) is technologically efficient but may not be
Topic: Economic Profit economically efficient.
Skill: Conceptual D) may be neither economically efficient nor
21) Among the opportunity costs of a firm are all technologically efficient.
of the following EXCEPT Answer: A
A) the owner’s forgone wage.
B) explicit costs of inputs such as labor. Topic: Technological and Economic Efficiency
Skill: Analytical
C) normal profits.
25) Profits can be maximized only by firms that
D) economic profits.
Answer: D
achieve
A) technological efficiency and economic
Topic: Economic Profit efficiency.
Skill: Analytical B) technological efficiency but not necessarily
22) Ed is a freelance writer who could work for a those that achieve economic efficiency.
newspaper at $25,000 a year but instead works C) neither economic nor technological
for himself for $41,000 a year. His only efficiency.
business expenses are $1,000 for writing D) None of the above answers are correct
materials and $12,000 for rent. Ed’s normal because the achievement of technological
profit is $1,000. Ed’s economic profit from efficiency and economic efficiency has
working as a freelance writer is nothing to do with profit maximization.
A) $1,000. Answer: A
B) $2,000.
C) $15,000. Topic: Technological and Economic Efficiency
Skill: Conceptual
D) $25,000.
Answer: B
26) A firm that is technologically efficient
A) must be economically efficient, but a firm
Topic: Market Constraints that is economically efficient is not always
Skill: Recognition technologically efficient.
23) A firm’s market constraints include the B) must be economically efficient, and a firm
conditions under which it can that is economically efficient must always be
A) convert inputs into outputs. technologically efficient.
B) buy its inputs and sell its outputs. C) is not always economically efficient, and a
C) issue stock. firm that is economically efficient is not
D) produce the inputs to production. always technologically efficient.
Answer: B D) is not always economically efficient, but a
firm that is economically efficient must
always be technologically efficient.
Answer: D
ORGANIZING PRODUCTION 169

Topic: Technological and Economic Efficiency Topic: Technological Efficiency

Skill: Conceptual Skill: Conceptual
27) A method that is technologically inefficient 30) The accountant for Muzhi’s Sushi claims that
A) may or may not be economically efficient. Muzhi has accomplished “technological
B) can never be economically efficient. efficiency.” This means that Muhzi’s Sushi
C) results from failure to calculate the ratio of A) produces a given output using the least inputs.
the cost of labor to the cost of capital. B) produces a given output at the lowest cost.
D) means that it uses too much labor and too C) has an economic profit greater than a normal
little capital. profit.
Answer: B D) has a normal profit greater than a economic
profit.
Topic: Technological Efficiency Answer: A
Skill: Conceptual
28) A firm uses labor and capital. To tell if the firm Topic: Economic Efficiency
is technologically efficient, you Skill: Conceptual
A) do not need to know the cost of labor or the 31) The accountant for Muzhi’s Sushi claims that
cost of capital. Muzhi has accomplished “economic
B) need to know the cost of capital but not the efficiency.” This means that Muhzi’s Sushi
cost of labor. A) produces a given output using the least inputs.
C) need to know the cost of labor and the cost of B) produces a given output at the lowest cost.
capital. C) has an economic profit greater than a normal
D) need to know the cost of labor but not the cost profit.
of capital. D) has a normal profit greater than a economic
Answer: A profit.
Answer: B
Topic: Technological Efficiency
Skill: Analytical Topic: Economic Efficiency
29) Firm A can produce a unit of output with 10 Skill: Analytical
hours of labor and 5 units of material. Firm B 32) Firm A can produce a unit of output with 10
can produce a unit of output with 5 hours of hours of labor and 5 units of material. Firm B
labor and 10 units of material. Firm C can can produce a unit of output with 5 hours of
produce a unit of output with 10 hours of labor labor and 10 units of material. Firm C can
and 10 units of material. If the prices of labor produce a unit of output with 10 hours of labor
and material are $10 per hour and $5 per unit, and 10 units of material. If the prices of labor
respectively, which of these firms is the most and material are $10 per hour and $5 per unit,
technologically efficient? respectively, which of these firms is the most
A) Firm A only. economically efficient?
B) Firm B only. A) Firm A only.
C) Firm C only. B) Firm B only.
D) Firms A and B could both be technologically C) Firm C only.
efficient. D) Firms A and B could both be economically
Answer: D efficient.
Answer: B
170 CHAPTER 10

Techniques that produce 100 sweaters Topic: Economic Efficiency

Skill: Analytical
Labor Capital
Technique (hours) (machines) 36) Using the data in the above table, if the price of
an hour of labor is $20 and the price of a unit
A 10 35
of capital is $10, then the most economically
B 25 25
efficient technique for producing 100 sweaters
C 10 60
is
D 30 20
A) A.
Topic: Technological Efficiency B) B.
Skill: Analytical
C) C.
33) In the above table, the technique that is not
D) D.
technologically efficient is Answer: A
A) A.
B) B.
C) C.  Information and Organization
D) D. Topic: Information and Organization
Answer: C Skill: Recognition
Topic: Economic Efficiency
37) Firms organize production by using a mix of
Skill: Analytical A) command and incentive systems.
34) In the above table, the technique that is never B) market and agency systems.
economically efficient is C) command and market systems.
A) A. D) incentive and agency systems.
B) B. Answer: A
C) C. Topic: Incentive System
D) D. Skill: Conceptual
Answer: C 38) A golf club manufacturer pays its telemarketers
Topic: Economic Efficiency
based on the number of golf clubs they sell.
Skill: Analytical This firm
35) Using the data in the above table, if the price of A) organizes production based on an incentive
an hour of labor is $10 and the price of a unit system.
of capital is $20, then the most economically B) organizes production based on a command
efficient technique for producing 100 sweaters system.
is C) does not have any implicit costs.
A) A. D) does not have explicit costs.
B) B. Answer: A
C) C. Topic: Incentive System
D) D. Skill: Conceptual
Answer: D 39) Gilda’s Art Gallery rewards its employees with
stock each year the gallery makes profits. This
stock allows the employees to own part of the
gallery. This practice is known as
A) the principle-agent problem.
B) incentive pay.
C) minimizing implicit costs.
D) minimizing explicit costs.
Answer: B
ORGANIZING PRODUCTION 171

Topic: Command Systems Topic: The Principal-Agent Problem

Skill: Recognition Skill: Conceptual
40) A command system is a method of 45) A manager in a corporation is likely to be
coordinating the productive resources that a A) both a principal and an agent.
firm hires. It B) neither a principal nor an agent.
A) uses the invisible hand of the market. C) an agent but not a principal.
B) relies on incentive systems. D) a principal but not an agent.
C) is based on a managerial hierarchy. Answer: A
D) completely overcomes the principal-agent
Topic: The Principal-Agent Problem
problem. Skill: Conceptual
Answer: C
46) In the principal-agent relationship between a
Topic: The Principal-Agent Problem bank manager and a bank teller, the manager is
Skill: Analytical A) an agent, as is the teller.
41) A large part of the principal-agent problem B) an agent and the teller is a principal.
stems from the desire of C) a principal and the teller is an agent.
A) agents to work hard. D) a principal, as is the teller.
B) agents to avoid working. Answer: C
C) principals to work hard.
Topic: The Principal-Agent Problem; Ownership
D) principals to avoid working. Skill: Conceptual
Answer: B
47) Giving managers an ownership stake in a
Topic: The Principal-Agent Problem company is an example of
Skill: Recognition A) a command system.
42) The principal-agent problem is the issue of B) an incentive system.
inducing C) a system that encourages managers to become
A) agents and principals to work hard. agents that monitor their principals.
B) principals to act in the best interests of agents. D) economies of scope.
C) agents to act in the best interests of principals. Answer: B
D) None of the above answers are correct.
Answer: C Topic: The Principal-Agent Problem; Incentive Pay
Skill: Analytical
Topic: The Principal-Agent Problem 48) One of the three main ways of coping with the
Skill: Analytical principal-agent problem is
43) When bank tellers converse with each other, A) giving orders.
keeping customers waiting in line, they are B) providing incentive pay.
A) unemployed. C) shirking.
B) out of the labor force. D) using only short-term contracts.
C) working in the best interest of the agent. Answer: B
D) working in the best interest of the principals.
Answer: C Topic: The Principal-Agent Problem; Incentive Pay
Skill: Analytical
Topic: The Principal-Agent Problem 49) A chief reason firms give employees bonuses
Skill: Conceptual based on the firm’s profit is to cope with
44) In their relationship with stockholders, a firm’s A) the tax laws.
managers act B) the law of diminishing returns.
A) as agents. C) the principal-agent problem.
B) as principals. D) unions.
C) in loco parentis. Answer: C
D) as proprietors.
Answer: A
172 CHAPTER 10

Topic: The Principal-Agent Problem; Long-Term Topic: Partnership

Contracts Skill: Recognition
Skill: Analytical 55) As owner of a one-third share of a partnership,
50) A chief purpose of long-term contracts is to Josh is legally liable for
improve agents’ A) none of its debts.
A) information. B) one-third of its debts.
B) incentives. C) all of its debts.
C) control over principals. D) all of its taxes but none of its private debt.
D) security. Answer: C
Answer: B
Topic: Partnership
Topic: Proprietorship Skill: Analytical
Skill: Conceptual 56) The profits of a partnership are
51) The owner of a proprietorship has ____ A) treated as personal income.
liability and ____ required to use all of his or B) subject to a corporate tax.
her entire wealth to pay for the firm’s losses. C) taxed as capital gains indexed for inflation.
A) limited; may be D) exempt from taxation.
B) limited; is not Answer: A
C) unlimited; may be
D) unlimited; is not Topic: Corporation
Answer: C Skill: Analytical
57) The owner of a proprietorship might
Topic: Proprietorship incorporate the firm in order to
Skill: Recognition A) be able to conduct business in more than one
52) The legal responsibility for losses incurred by a county.
proprietorship falls upon the B) avoid the principal-agent problem.
A) shareholders. C) be eligible for patent protection of new
B) partners. products.
C) owner. D) gain limited liability.
D) creditors. Answer: D
Answer: C
Topic: Corporation
Topic: Proprietorship Skill: Analytical
Skill: Recognition 58) Owners of a proprietorship have
53) The profits of a proprietorship are A) limited liability. So do stockholders in a
A) taxed at the same rate as the owner’s other corporation.
personal income. B) limited liability. Stockholders in a
B) subject to a corporate tax. corporation have unlimited liability.
C) taxed as capital gains indexed for inflation. C) unlimited liability. So do stockholders in a
D) exempt from taxation. corporation.
Answer: A D) unlimited liability. Stockholders in a
corporation have limited liability.
Topic: Partnership
Answer: D
Skill: Recognition
54) A firm with two or more owners who have
unlimited liability is known as
A) a partnership.
B) a proprietorship.
C) a corporation.
D) an establishment.
Answer: A
ORGANIZING PRODUCTION 173

Topic: Corporation Topic: Corporation

Skill: Recognition Skill: Recognition
59) An advantage of the corporation over other 64) Most corporations have to pay higher tax rates
forms of business organization is that than do proprietorships and partnerships. But
A) the owners have unlimited liability. corporations have the advantage of
B) a corporation’s profits are taxed only once. A) being able to engage in foreign trade.
C) large-scale, low-cost capital is more readily B) enjoying limited liability.
available. C) being protected by the commerce clause of
D) the decision-making structure is simple. the Constitution.
Answer: C D) immunity from antitrust prosecution.
Answer: B
Topic: Corporation
Skill: Recognition Topic: Corporation
60) An advantage of the corporate form of Skill: Conceptual
organization is that 65) A corporation pays
A) owners have joint unlimited liability. A) taxes on its profits, and stockholders pay
B) owners have limited liability. taxes on the income they receive as
C) owners have individual unlimited liability. dividends.
D) creditors have unlimited liability. B) taxes on its profits, but stockholders pay no
Answer: B taxes on the income they receive as
dividends.
Topic: Corporation
C) no taxes on its profits, but stockholders pay
Skill: Analytical
61) The stockholders of a corporation have ____ taxes on the income they receive as
liability and ____ required to pay all of the dividends.
firm’s losses. D) no taxes on its profits, and stockholders pay
no taxes on the income they receive as
A) limited; are
dividends.
B) limited; are not Answer: A
C) unlimited; are
D) unlimited; are not Topic: Relative Importance of Different Types of
Answer: B Firms
Skill: Recognition
Topic: Corporation 66) The manufacturing sector is dominated by
Skill: Conceptual
A) corporations.
62) The limited liability enjoyed by a corporation
B) partnerships.
protects its
C) proprietorships.
A) employees. D) government firms.
B) managers. Answer: A
C) stockholders.
D) customers. Topic: Relative Importance of Different Types of
Answer: C Firms
Skill: Recognition
Topic: Corporation 67) The type of firm that is most numerous is the
Skill: Analytical A) proprietorship.
63) Stockholders of a corporation have ____ B) corporation.
liability; corporate profits are taxed ____. C) partnership.
A) limited; once D) multinational.
B) limited; twice Answer: A
C) unlimited; once
D) unlimited; twice
Answer: B
174 CHAPTER 10

Topic: Relative Importance of Different Types of Topic: The Four-Firm Concentration Ratio
Firms Skill: Analytical
Skill: Recognition 72) If an industry is monopolized by one firm, the
68) The vast majority of all business sales are four-firm concentration ratio equals
accounted for by A) 1 percent.
A) partnerships. B) 25 percent.
B) corporations. C) 40 percent.
C) proprietorships. D) 100 percent.
D) nonprofit organizations. Answer: D
Answer: B
Topic: The Four-Firm Concentration Ratio
Skill: Conceptual
 Markets and the Competitive 73) If an industry has a four-firm concentration
Environment ratio equal to one hundred percent, then it can
safely be concluded that
Topic: Measures of Concentration
Skill: Recognition A) the industry is a monopoly.
69) Industry concentration measures the extent to B) the industry is perfectly competitive.
which C) the industry is monopolistically competitive.
A) products are differentiated by the firms in the D) the industry is either a monopoly or an
industry. oligopoly.
Answer: D
B) the market is dominated by a small number of
firms. Topic: The Four-Firm Concentration Ratio
C) the industry executives concentrate on their Skill: Conceptual
product. 74) If the four-firm concentration ratio for an
D) consumers are geographically concentrated. industry equals 100 percent, then definitely
Answer: B A) the Herfindahl-Hirschman Index (HHI) equals
Topic: The Four-Firm Concentration Ratio 10,000.
Skill: Recognition B) the industry is a monopoly.
70) The four-firm concentration ratio equals the C) a small number of firms are in the industry.
percentage of the value of ____ accounted for D) there are no barriers to entry into the industry.
by the four ____ firms in the industry. Answer: C
A) sales; smallest Topic: The Four-Firm Concentration Ratio and the
B) profits; smallest Herfindahl-Hirschman Index
C) sales; largest Skill: Conceptual
D) profits; largest 75) If an industry were perfectly competitive, the
Answer: C four-firm concentration ratio would be close to
____ and the Herfindahl-Hirschman index
Topic: The Four-Firm Concentration Ratio
would be close to ____.
Skill: Conceptual
71) A high four-firm concentration ratio implies A) 0; 0
B) 0; 100
A) an absence of differentiation.
C) 100; 0.
B) a presence of differentiation.
D) 100; 100.
C) an absence of competition.
Answer: A
D) a presence of competition.
Answer: C
ORGANIZING PRODUCTION 175

Sales Topic: The Four-Firm Concentration Ratio and the

Herfindahl-Hirschman Index
Company (thousands of
Skill: Analytical
dollars)
79) The above table shows the market shares for all
A 750 the landscaping services in a suburban area. A
B 500 merger between the three largest firms would
C 250
A) make the industry more competitive.
D 125
B) increase the four-firm concentration ratio and
E 125
increase the Herfindahl-Hirschman Index
F 125
(HHI).
G 125
C) increase the four-firm concentration ratio and
H 125 decrease the Herfindahl-Hirschman Index
I 125 (HHI).
J 125 D) decrease the four-firm concentration ratio and
K 125 decrease the Herfindahl-Hirschman Index
Topic: The Four-Firm Concentration Ratio (HHI).
Skill: Analytical Answer: B
76) The above table shows the market shares for all
the landscaping services in a suburban area. Topic: The Herfindahl-Hirschman Index
The four-firm concentration ratio equals Skill: Analytical
A) 30 percent. 80) The above table shows the market shares for all
B) 60 percent. the landscaping services in a suburban area.
C) 65 percent. The Herfindahl-Hirschman Index (HHI) equals
D) 100 percent. A) 65.
Answer: C B) 900.
C) 1400.
Topic: The Four-Firm Concentration Ratio D) 1600.
Skill: Analytical Answer: D
77) The above table shows the market shares for all
the landscaping services in a suburban area. Topic: Limitations of Concentration Measures;
Which of the following mergers would cause Geographic Scope
the greatest increase in the four-firm Skill: Conceptual
concentration ratio? 81) Even though the market for bricks has a low
A) A and B concentration ratio nationally, the U.S. Justice
B) D and E Department might still scrutinize any mergers
C) E and F in this industry because
D) six of the smallest firms A) the HHI is high nationally.
Answer: D B) the HHI is above 1800 nationally.
C) the HHI is below 1800 nationally.
Topic: The Four-Firm Concentration Ratio D) the market is regional not national, and the
Skill: Analytical regional concentration might be high.
78) The above table shows the market shares for all Answer: D
the landscaping services in a suburban area. A
merger between firms E and F would
A) raise the four-firm concentration ratio.
B) have no effect on the four-firm concentration
ratio.
C) lower the four-firm concentration ratio.
D) create a monopoly.
Answer: A
176 CHAPTER 10

 Firms and Markets Topic: Why Firms?; Team Production

Skill: Recognition
Topic: Why Firms?; Transactions Costs 86) Team production is a production process in
Skill: Conceptual
which
82) One reason why firms replace markets for
A) pay is based on group output.
some activities is that firms
B) individuals specialize in mutually supportive
A) reduce the number of transactions required. tasks.
B) enable individuals to avoid a large portion of C) competing groups perform identical tasks.
their taxes. D) individuals rotate from one task to another.
C) reduce the rate at which the product is Answer: B
wasted.
D) do not require team production. Topic: Why Firms?; Team Production
Answer: A Skill: Recognition
87) A firm with a sales department, a production
Topic: Why Firms?; Transactions Costs department, and a marketing department
Skill: Analytical
provides an example of
83) A key reason for the existence of firms is that,
A) team production.
compared to markets, firms often achieve
B) joint production.
lower
C) economies of scale.
A) explicit costs. D) economies of different departments.
B) transactions costs. Answer: A
C) accounting costs.
D) scope of team production.
Answer: B  Study Guide Questions
Topic: Why Firms?; Transactions Costs Topic: Study Guide Question, Explicit Costs
Skill: Analytical Skill: Analytical
84) Of the following, the one that is NOT generally 88) Which of the following is an explicit cost of
a transaction cost is the operating a business?
A) fee to a broker for buying stocks. A) The opportunity cost of the land and buildings
B) cost of a lawyer who drafts a contract. the firm owns and uses.
C) cost of the owner’s time in a proprietorship. B) The opportunity cost of the owners’ time.
D) cost of phone calls made to find a buyer. C) The interest not earned on funds that were
Answer: C used to buy capital equipment.
D) The interest paid back on a bank loan that the
Topic: Why Firms?; Economies of Scale owners obtained to help finance the company.
Skill: Recognition Answer: D
85) When the cost of producing a unit of a good
decreases as its output rate increases, there are Topic: Study Guide Question, Economic Profit
economies of Skill: Conceptual
A) scale. 89) An economic profit is
B) scope. A) an explicit opportunity cost of the company.
C) production. B) a cost that is always measured by the
D) size. accountant.
Answer: A C) the amount of profit an accountant calculates
for a company.
D) not the same as the company’s normal profit.
Answer: D
ORGANIZING PRODUCTION 177

Topic: Study Guide Question, Relative Importance of Topic: Study Guide Question, Corporation
Different Types of Firms Skill: Conceptual
Skill: Recognition 94) A form of business whose profits are taxed
90) Which type of firm produces the largest share twice is
of manufacturing output? A) a proprietorship.
A) Proprietorships only. B) a partnership.
B) Partnerships only. C) a corporation.
C) Corporations only. D) either a proprietorship or a partnership,
D) Proprietorships and corporations are tied. depending on other information.
Answer: C Answer: C

Topic: Study Guide Question, Proprietorship and

Partnership
Skill: Conceptual
91) Which of the following firms has unlimited
liability?
A) Only proprietorships.
B) Only partnerships.
C) Only corporations.
D) Both proprietorships and partnerships.
Answer: D

Topic: Study Guide Question, Partnership

Skill: Conceptual
92) Suppose that Tracy and Pat start a business.
Because of a series of bad decisions by Tracy,
the company goes bankrupt, owing a total of
$50,000. Tracy is penniless and Pat is a
millionaire. If the company were organized as
a partnership, Pat would be responsible for
A) over $1 million of debt.
B) $50,000 of debt.
C) $25,000 of debt.
D) $0 of debt.
Answer: B

Topic: Study Guide Question, Corporation

Skill: Recognition
93) What is the major advantage of the corporate
form of business organization?
A) Its owners have limited liability.
B) Its owners have unlimited liability.
C) Its profits are not taxed.
D) Its profits are taxed twice.
Answer: A
178