econ quiz businesses and firms

What’s a business firm?

A business organization that uses resources to produce goods or services for profit.

What’s the #1 goal for businesses?

To maximize profit.

Why is shirking a big problem?

Because employees may avoid work or responsibility, reducing efficiency and profits.

Why might a company make a manager a residual claimant?

To give them incentive to work harder since they receive leftover profits after costs.

What’s a sole proprietorship?

A business owned and operated by one person.

Who can run a sole proprietorship?

Anyone who owns the business.

What are the advantages and disadvantages of a sole proprietorship?

Advantages: easy to start, owner keeps all profits. Disadvantages: unlimited liability, limited resources, limited lifespan.

How are taxes paid by SP?

Owner reports income on personal tax return (single taxation).

Do sole proprietors have limited liability?

No, they have unlimited liability.

What’s a partnership?

A business owned by two or more people who share profits and responsibilities.

How are taxes paid by owners of a business partnership?

Each partner pays taxes on their share of the profits (single taxation).

What’s a limited partner?

A partner who invests money but does not manage the business and has limited liability.

What’s a general partner?

A partner who manages the business and has unlimited liability.

What are the advantages and disadvantages of a partnership?

Advantages: easy to form, shared skills and capital. Disadvantages: potential conflicts, unlimited liability for general partners.

Do general partners have limited liability?

No, they have unlimited liability.

What’s a corporation?

A business owned by shareholders with legal rights of a person.

Do corporations have limited liability?

Yes, owners (shareholders) are only responsible for their investment.

What are the advantages and disadvantages of corporations?

Advantages: limited liability, easier to raise capital. Disadvantages: double taxation, complex setup.

What’s a stock?

A share of ownership in a corporation.

Why would someone become a stockholder?

To earn profits through dividends or stock price increases.

What are the two ways someone can make money off of stocks?

Receiving dividends and selling stock for a higher price.

What’s the liability of a stockholder?

Limited to the amount they invested.

Why would a corporation sell stocks (rather than bonds)?

To raise money without going into debt.

What are assets?

Resources owned by a business that have value (e.g., buildings, cash, equipment).

What is a bond?

A loan from an investor to a business or government, repaid with interest.

What’s the “face value” of a bond?

The amount the borrower agrees to pay back at maturity.

What happens at the “maturity date” of a bond?

The borrower repays the face value to the bondholder.

What are the major advantages of starting a corporation?

Limited liability, easier to raise funds, unlimited life, transferable ownership.

What does it mean if a corporation “goes public” (has an initial public offering)?

It sells shares of stock to the public for the first time.

Who runs a corporation?

A board of directors and corporate officers (CEO, CFO, etc.).

What’s a franchise?

A business that licenses the right to use its name, brand, and products to another business owner.

What’s a franchisor?

The company that owns the brand and sells the rights to franchisees.

What’s a franchisee?

The individual or business that buys the right to operate under the franchisor’s name.

Why might someone want to become a franchisor?

To expand the brand and earn franchise fees and royalties.

How do you determine revenue? (formula)

Revenue = Price × Quantity Sold.

How do you determine profit? (formula)

Profit = Total Revenue − Total Cost.

What kind of costs do businesses have?

Fixed costs and variable costs.

How is the total cost of production determined? (formula)

Total Cost = Fixed Costs + Variable Costs.

When should a company shut down?

When total revenue is less than variable costs.

What type of business structure captures the most revenue?

Corporations.

How do firms decide where they should be located?

They consider costs, access to customers, labor, and resources.

What is asymmetric information? How can it be harmful to employees and customers?

When one party knows more than the other, leading to unfair deals or poor decisions.

Who is Milton Friedman? What is his philosophy on business?

An economist who believed a business’s main responsibility is to increase profits for shareholders.

Who is Ralph Nader? What is his philosophy on business?

A consumer advocate who believed businesses should also protect consumers and serve the public interest.