Econ B251 Final Exam questions and
answers
Explicit costs✔✔Out-of-pocket production expenses recorded using the accounting
method
Implicit costs✔✔Measure the alternative uses of 3 types of resources, such as
physical capital, interest payment, and time
Normal profit✔✔The income associated with the entrepreneur
Command system✔✔When workers follow directions from their boss above them
and provide feedback to their boss
Incentive system✔✔When firms have a well-defined and well incentivized
organizational hierarchy to help maximize profit
Perfect information✔✔Occurs when all relevant information is known to everyone
Imperfect information✔✔Occurs when not all pertinent information is known to all
decision-makers
Symmetric information✔✔Everyone has the same amount of information
Asymmetric information✔✔Occurs when the amount of information differs among
decision-makers
Adverse selection✔✔Occurs when buyers or sellers have more information than the
other
Moral hazard✔✔When more informed individuals have an incentive to behave or act
differently because they do not bear the total costs of their actions
Principal-agent problem✔✔Occurs when principals'(business owners) and
agents'(workers) self-interests are not aligned
Proprietorship✔✔Sole owner, benefits from making decisions and keeping all profits,
but bears all the costs for losses and has unlimited liability
Partnership✔✔More than one owner, divides responsibility among the partners, but
has unlimited liability of the firm's debts, partners may also disagree
Corporation✔✔Generates the most significant amount of revenue, owners are
shareholders, limited liability, owners are not responsible for debt, but double tax
liability
answers
Explicit costs✔✔Out-of-pocket production expenses recorded using the accounting
method
Implicit costs✔✔Measure the alternative uses of 3 types of resources, such as
physical capital, interest payment, and time
Normal profit✔✔The income associated with the entrepreneur
Command system✔✔When workers follow directions from their boss above them
and provide feedback to their boss
Incentive system✔✔When firms have a well-defined and well incentivized
organizational hierarchy to help maximize profit
Perfect information✔✔Occurs when all relevant information is known to everyone
Imperfect information✔✔Occurs when not all pertinent information is known to all
decision-makers
Symmetric information✔✔Everyone has the same amount of information
Asymmetric information✔✔Occurs when the amount of information differs among
decision-makers
Adverse selection✔✔Occurs when buyers or sellers have more information than the
other
Moral hazard✔✔When more informed individuals have an incentive to behave or act
differently because they do not bear the total costs of their actions
Principal-agent problem✔✔Occurs when principals'(business owners) and
agents'(workers) self-interests are not aligned
Proprietorship✔✔Sole owner, benefits from making decisions and keeping all profits,
but bears all the costs for losses and has unlimited liability
Partnership✔✔More than one owner, divides responsibility among the partners, but
has unlimited liability of the firm's debts, partners may also disagree
Corporation✔✔Generates the most significant amount of revenue, owners are
shareholders, limited liability, owners are not responsible for debt, but double tax
liability
