,Chapter 1: MANAGERS, PROFITS, AND MARKETS
Multiple Choice
1-1 Economic theory is a valuable tool for business decision making because it
a. identifies for managers the essential information for making a decision.
b. assumes away the problem.
c. creates a realistic, complex model of the business firm.
d. provides an easy solution to complex business problems.
Answer: a
Difficulty: 01 Easy
Topic: The Economic Way of Thinking about Business Practices and Strategy
AACSB: Reflective Thinking
Blooms: Remember
Learning Objective: 01-01
1-2 Economic profit
a. is a theoretical measure of a firm’s performance and has little value in real world decision
making.
b. can be calculated by subtracting implicit costs of using owner-supplied resources from
the firm’s total revenue.
c. is negative when total costs exceed total revenues.
d. is generally larger than accounting profit.
Answer: c
Difficulty: 01 Easy
Topic: The Economic Way of Thinking about Business Practices and Strategy
AACSB: Reflective Thinking
Blooms: Remember
Learning Objective: 01-02
1-3 Economic profit is the difference between
a. total revenue and the opportunity cost of all of the resources used in production.
b. total revenue and the implicit costs of using owner-supplied resources.
c. accounting profit and the opportunity cost of the market-supplied resources used by the firm.
d. accounting profit and explicit costs.
Answer: a
Difficulty: 01 Easy
Topic: The Economic Way of Thinking about Business Practices and Strategy
AACSB: Reflective Thinking
Blooms: Remember
Learning Objective: 01-02
1-4 When economic profit is positive,
a. total revenue exceeds total economic cost.
b. the firm’s owners have successfully solved the principle-agent problem.
c. the firm’s owners experience a decrease in their wealth.
d. foreign companies experience loss of market share
Answer: a
1
Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the
prior written consent of McGraw-Hill Education.
, Difficulty: 01 Easy
Topic: The Economic Way of Thinking about Business Practices and Strategy
AACSB: Reflective Thinking
Blooms: Remember
Learning Objective: 01-02
1-5 Consider a firm that employs some resources that are owned by the firm. When accounting profit
is zero, economic profit
a. must also equal zero.
b. is sure to be positive.
c. must be negative and shareholder wealth is reduced.
d. cannot be computed accurately, but the firm is breaking even nonetheless.
Answer: c
Difficulty: 02 Medium
Topic: The Economic Way of Thinking about Business Practices and Strategy
AACSB: Analytical Thinking
Blooms: Apply
Learning Objective: 01-02
1-6 Which of the following statements is false?
a. Explicit costs of using market-supplied resources entail an opportunity cost equal to the
dollar cost of obtaining the resources in the market.
b. When economic profit is zero, the firm’s owners could not have done better putting their
resources in some other industry of comparable risk.
c. If economic profit is positive, accounting profit must also be positive.
d. If economic profit is negative, accounting profit must also be negative.
e. None of the above statements is false.
Answer: d
Difficulty: 02 Medium
Topic: The Economic Way of Thinking about Business Practices and Strategy
AACSB: Analytical Thinking
Blooms: Apply
Learning Objective: 01-02
1-7 The value of a firm is
a. smaller the higher is the risk premium used to compute the firm’s value.
b. larger the higher is the risk premium used to compute the firm’s value.
c. the price for which the firm can be sold minus the present value of the expected future
profits.
d. both b and c
Answer: a
Difficulty: 02 Medium
Topic: The Economic Way of Thinking about Business Practices and Strategy
AACSB: Analytical Thinking
Blooms: Apply
Learning Objective: 01-02
1-8 Suppose Marv, the owner-manager of Marv’s Hot Dogs, earned $82,000 in revenue last year.
Marv’s explicit costs of operation totaled $36,000. Marv has a Bachelor of Science degree in
mechanical engineering and could be earning $40,000 annually as mechanical engineer.
2
Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the
prior written consent of McGraw-Hill Education.
, a. Marv's implicit cost of using owner-supplied resources is $36,000.
b. Marv's economic profit is $36,000.
c. Marv’s implicit cost of using owner-supplied resources is $30,000.
d. Marv's economic profit is $6,000.
Answer: d
Difficulty: 01 Easy
Topic: The Economic Way of Thinking about Business Practices and Strategy
AACSB: Analytical Thinking
Blooms: Apply
Learning Objective: 01-02
1-9 A risk premium is
a. a measure calculated to reflect the riskiness of future profits.
b. subtracted from the discount rate when calculating the present value of a future stream of
profits.
c. lower the riskier the future stream of profits.
d. an additional compensation paid to the workers of a business enterprise.
Answer: a
Difficulty: 01 Easy
Topic: The Economic Way of Thinking about Business Practices and Strategy
AACSB: Reflective Thinking
Blooms: Remember
Learning Objective: 01-02
1-10 Owners of a firm want the managers to make business decisions which will
a. maximize the value of the firm.
b. maximize expected profit in each period of operation.
c. maximize the market share of the firm.
d. both a and b are correct when revenue and cost conditions in one time period are
independent of revenues and costs in future time periods.
Answer: d
Difficulty: 02 Medium
Topic: The Economic Way of Thinking about Business Practices and Strategy
AACSB: Analytical Thinking
Blooms: Apply
Learning Objective: 01-02
1-11 The principal-agent problem arises when
a. the principal and the agent have different objectives.
b. the principal cannot enforce the contract with the agent or finds it too costly to monitor
the agent.
c. the principal cannot decide whether the firm should seek to maximize the expected future
profits of the firm or maximize the price for which the firm can be sold.
d. both a and b
Answer: d
Difficulty: 01 Easy
Topic: Separation of Ownership and Control of the Firm
AACSB: Reflective Thinking
Blooms: Remember
Learning Objective: 01-03
3
Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the
prior written consent of McGraw-Hill Education.
Multiple Choice
1-1 Economic theory is a valuable tool for business decision making because it
a. identifies for managers the essential information for making a decision.
b. assumes away the problem.
c. creates a realistic, complex model of the business firm.
d. provides an easy solution to complex business problems.
Answer: a
Difficulty: 01 Easy
Topic: The Economic Way of Thinking about Business Practices and Strategy
AACSB: Reflective Thinking
Blooms: Remember
Learning Objective: 01-01
1-2 Economic profit
a. is a theoretical measure of a firm’s performance and has little value in real world decision
making.
b. can be calculated by subtracting implicit costs of using owner-supplied resources from
the firm’s total revenue.
c. is negative when total costs exceed total revenues.
d. is generally larger than accounting profit.
Answer: c
Difficulty: 01 Easy
Topic: The Economic Way of Thinking about Business Practices and Strategy
AACSB: Reflective Thinking
Blooms: Remember
Learning Objective: 01-02
1-3 Economic profit is the difference between
a. total revenue and the opportunity cost of all of the resources used in production.
b. total revenue and the implicit costs of using owner-supplied resources.
c. accounting profit and the opportunity cost of the market-supplied resources used by the firm.
d. accounting profit and explicit costs.
Answer: a
Difficulty: 01 Easy
Topic: The Economic Way of Thinking about Business Practices and Strategy
AACSB: Reflective Thinking
Blooms: Remember
Learning Objective: 01-02
1-4 When economic profit is positive,
a. total revenue exceeds total economic cost.
b. the firm’s owners have successfully solved the principle-agent problem.
c. the firm’s owners experience a decrease in their wealth.
d. foreign companies experience loss of market share
Answer: a
1
Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the
prior written consent of McGraw-Hill Education.
, Difficulty: 01 Easy
Topic: The Economic Way of Thinking about Business Practices and Strategy
AACSB: Reflective Thinking
Blooms: Remember
Learning Objective: 01-02
1-5 Consider a firm that employs some resources that are owned by the firm. When accounting profit
is zero, economic profit
a. must also equal zero.
b. is sure to be positive.
c. must be negative and shareholder wealth is reduced.
d. cannot be computed accurately, but the firm is breaking even nonetheless.
Answer: c
Difficulty: 02 Medium
Topic: The Economic Way of Thinking about Business Practices and Strategy
AACSB: Analytical Thinking
Blooms: Apply
Learning Objective: 01-02
1-6 Which of the following statements is false?
a. Explicit costs of using market-supplied resources entail an opportunity cost equal to the
dollar cost of obtaining the resources in the market.
b. When economic profit is zero, the firm’s owners could not have done better putting their
resources in some other industry of comparable risk.
c. If economic profit is positive, accounting profit must also be positive.
d. If economic profit is negative, accounting profit must also be negative.
e. None of the above statements is false.
Answer: d
Difficulty: 02 Medium
Topic: The Economic Way of Thinking about Business Practices and Strategy
AACSB: Analytical Thinking
Blooms: Apply
Learning Objective: 01-02
1-7 The value of a firm is
a. smaller the higher is the risk premium used to compute the firm’s value.
b. larger the higher is the risk premium used to compute the firm’s value.
c. the price for which the firm can be sold minus the present value of the expected future
profits.
d. both b and c
Answer: a
Difficulty: 02 Medium
Topic: The Economic Way of Thinking about Business Practices and Strategy
AACSB: Analytical Thinking
Blooms: Apply
Learning Objective: 01-02
1-8 Suppose Marv, the owner-manager of Marv’s Hot Dogs, earned $82,000 in revenue last year.
Marv’s explicit costs of operation totaled $36,000. Marv has a Bachelor of Science degree in
mechanical engineering and could be earning $40,000 annually as mechanical engineer.
2
Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the
prior written consent of McGraw-Hill Education.
, a. Marv's implicit cost of using owner-supplied resources is $36,000.
b. Marv's economic profit is $36,000.
c. Marv’s implicit cost of using owner-supplied resources is $30,000.
d. Marv's economic profit is $6,000.
Answer: d
Difficulty: 01 Easy
Topic: The Economic Way of Thinking about Business Practices and Strategy
AACSB: Analytical Thinking
Blooms: Apply
Learning Objective: 01-02
1-9 A risk premium is
a. a measure calculated to reflect the riskiness of future profits.
b. subtracted from the discount rate when calculating the present value of a future stream of
profits.
c. lower the riskier the future stream of profits.
d. an additional compensation paid to the workers of a business enterprise.
Answer: a
Difficulty: 01 Easy
Topic: The Economic Way of Thinking about Business Practices and Strategy
AACSB: Reflective Thinking
Blooms: Remember
Learning Objective: 01-02
1-10 Owners of a firm want the managers to make business decisions which will
a. maximize the value of the firm.
b. maximize expected profit in each period of operation.
c. maximize the market share of the firm.
d. both a and b are correct when revenue and cost conditions in one time period are
independent of revenues and costs in future time periods.
Answer: d
Difficulty: 02 Medium
Topic: The Economic Way of Thinking about Business Practices and Strategy
AACSB: Analytical Thinking
Blooms: Apply
Learning Objective: 01-02
1-11 The principal-agent problem arises when
a. the principal and the agent have different objectives.
b. the principal cannot enforce the contract with the agent or finds it too costly to monitor
the agent.
c. the principal cannot decide whether the firm should seek to maximize the expected future
profits of the firm or maximize the price for which the firm can be sold.
d. both a and b
Answer: d
Difficulty: 01 Easy
Topic: Separation of Ownership and Control of the Firm
AACSB: Reflective Thinking
Blooms: Remember
Learning Objective: 01-03
3
Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the
prior written consent of McGraw-Hill Education.
