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Unformatted text preview: 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. 1-2 Economic profit a. is a theoretical measure of a firms 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 firms total revenue. c. is negative when costs exceed revenues. d. is generally larger than accounting profit. 1-3 Economic profit is a. the difference between total revenue and the opportunity cost of all of the resources used in production. b. the difference between total revenue and the implicit costs of using owner-supplied resources. c. the difference between accounting profit and the opportunity cost of the market-supplied resources used by the firm. d. the difference between accounting profit and explicit costs. 1-4 When economic profit is positive, a. total revenue exceeds total economic cost. b. the firms owners have successfully solved the principle-agent problem. c. the firms owners experience an increase in their wealth. d. both a and c e. all of the above 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. 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 firms 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. Chapter 1: M ANAGERS, PROFITS, AND MARKETS 1 1-7 The value of a firm is a. smaller the higher is the risk premium used to compute the firms value. b. larger the higher is the risk premium used to compute the firms 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 1-8 Suppose Marv, the owner-manager of Marvs Hot Dogs, earned $72,000 in revenue last year. Marvs explicit costs of operation totaled $36,000. Marv has a Bachelor of Science degree in mechanical engineering and could be earning $30,000 annually as mechanical engineer....
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- Summer '08