7. What is the primary benefit of having CPA firms audit the financial documents of publicly traded firms?

a. It gives information on how to cut costs to the firm audited.

b. It gives investors confidence that the firm is truthful and potentially profitable, and so it is easier for firms to sell stock and get loans as a result.

c. It saves taxpayers money as then government accountants don't need audit the documents.

d. It eliminates the chance a firm will go bankrupt.

8. George Akerloff focused the market for used cars and discussed an issue later generally called the "lemons problem." A "lemon" is a low quality used car, with the seller but not the potential buyer aware of this. Since sellers have more information about the quality of the car:

a. adverse selection causes an inefficiently small number of transactions to occur.

b. moral hazard causes an inefficiently large number of transactions to occur.

c. adverse selection causes an inefficiently large number of transactions to occur.

d. moral hazard causes an inefficiently small number of transactions to occur.

9. Which of the following is not required for the "invisible hand" described by Adam Smith to benefit society?

a. Both parties to a transaction must care about each other, and want to make the other person happy.

b. Property rights must be clear and enforced by law.

c. Property rights must be well defined.

d. Both parties to a transaction must be rational and well informed.

10. In order for a kickback to take place:

a. Those in private business must be corrupt (but government officials may be honest).

b. Government officials must be corrupt (but those in private business may be honest).

c. Rich people must have more political power than poor.

d. Someone must have the authority & responsibility to decide how to spend money of others.