Q4

1. In well functioning financial markets, and assuming rational behavior, why would a vegetarian prefer $100 worth of beef to $90 worth of vegetables?

Vegetables, by their very nature, are worth less than beef.

Vegetables will likely rise in value.

$90 is worth more than $100 due to the economic principle known as diminishing marginal return.

$90 is worth more than $100 due to the economic principle known as diminishing marginal utility of wealth.

The vegetarian thinks that beef is worth very little.

Beef will likely decline in value, while vegetables will not.

The vegetarian could choose the beef, sell the beef, buy the vegetables, and make him or her self better off.

All of the Above

None of the Above

2. Which of the following are argued to be distinctive characteristics of the corporation?

The ability of the shareholders to declare bankruptcy and therefore enjoy the protective shield of limited liability.

The fact that corporate earnings are taxed according to a separate set of tax rules.

The fact that corporations are often large enough that owners hire managers to run the firm day-to-day.

Both A and B are correct

Both A and C are correct

Both B and C are correct

A, B, and C are correct

3. According to the information in text on types of business organizations (Window 1.1 on page 8), which of the following is NOT true?

Compared with sole proprietorships and parterships, corporations require little paperwork and regulations.

Sole proprietorships must usually rely on bank loans and personal savings for investment funds.

Partnerships are simple to organize.

Sole proprietorships tend to be small businesses.

Corporations account for a minority percentage of total U.S. businesses but account for a majority of total U.S. business receipts and profits.

Partnerships typically suffer from unlimited liability, limited sources for investment funds, and a lack of continuity.

Profits earned through corporations are taxed twice; once at the corporate level, and again at the personal level if and when they are moved down to the personal level.

All of the Above

4. Farmer Ben knows that feeding a grain supplement to his cows will produce more milk according to the following schedule:

Total Pounds.....................Total Extra Pounds

of Supplement Used.....................of Milk

1.....................................................5

2.....................................................9

3..................................................12.3

4..................................................15.5

5....................................................18

6.................................................. 20

7..................................................21.5

8..................................................22.5

9....................................................23

Ignoring all other issues, how many pounds of grain supplement should Farmer Ben feed his cows if the price of milk is $0.20 per pound and the price of grain supplement is $0.70 per pound?

3

8

9

7

2

5

4

1

6

5. Select as choices all of the following that you believe depict the 'agency' relationship inside the corporation.

Note: A correct answer requires that you check ALL that apply.

One type of agency costs are lost opportunities caused by conflicts too difficult to resolve.

One of the goals of the study of modern corporate finance is to maximize agency costs.

The goals of the managers may not always align themselves with the goals of the shareholders.

In the context of the agency relationship managers are the principals.

The compensation plan has many advantages but using it to reduce agency costs is NOT one of these advantages.

In the context of the agency relationship shareholders are the principals.

The goal of shareholder wealth maximization often leads to agency costs.

6. Jeff knows that adding a special grain supplement to his cows will produce more milk according to the following schedule:

1/4 2/7 3/10 4/12 5/13 6/14

where the first number reports the total number of pounds of grain supplement, and the second number reports the total amount of milk produced. For example, 3/10 means that if the cow is fed 3 pounds of grain supplement, the cow will produce 10 units of milk.

How many pounds of grain supplement should Jeff feed the cows if the farm receives $0.30 per unit of milk and the price of grain supplement is $0.80 per pound?

2 pounds

6 pounds

3 pounds

4 pounds

5 pounds

7. Joe knows that adding a special grain supplement to his cows will produce more milk according to the following schedule:

1/3 2/6 3/8 4/10 5/11 6/12;

where the first number reports the total number of pounds of grain supplement, and the second number reports the total amount of milk produced. For example, 3/10 means that if the cow is fed 3 pounds of grain supplement, the cow will produce 10 units of milk.

How many pounds of grain supplement should Joe feed the cows if the farm receives $0.30 per unit of milk and the price of grain supplement is $0.50 per pound?

5 pounds

2 pounds

3 pounds

6 pounds

4 pounds

8. Jack knows that adding a special grain supplement to his cows will produce more milk according to the following schedule:

1/3 2/5 3/7 4/8 5/8.65 6/8.75;

where the first number reports the total number of pounds of grain supplement, and the second number reports the total amount of milk produced. For example, 3/7 means that if the cow is fed 3 pounds of grain supplement, the cow will produce 7 units of milk.

How many pounds of grain supplement should Jack feed the cows if the farm receives $0.50 per unit of milk and the price of grain supplement is $0.30 per pound?

3 pounds

5 pounds

6 pounds

4 pounds

2 pounds

9. Mike loves to eat burgers and chips at Burger King. His utility (happiness) from these two fast foods is listed as follows:

Burgers: 1/5 2/9 3/13 4/15 5/17 6/18

Chips: 1/8 2/11 3/12 4/13 5/14 6/14.5

where the first value reports the number of bugers or chips consumed, and the second number reports the total amount of happiness that number provides. For example, 4/15 means that if 4 burgers are consumed, Mike will enjoy 15 units of happiness.

If each burger and each order of chips cost $5 each, and if Mike has $25, Mike will buy how many burgers (the first number listed) and how many orders of chips (the second number listed)?

3, 2

4, 1

5, 0

2, 3

None of the Above

10. Mike loves to eat burgers and chips at Burger King. His utility (happiness) from these two fast foods is listed as follows:

Burgers: 1/5 2/9 3/13 4/15 5/17 6/18;

Chips: 1/8 2/11 3/12 4/13 5/14 6/14.5;

where the first value reports the number of bugers or chips consumed, and the second number reports the total amount of happiness that number provides. For example, 4/15 means that if 4 burgers are consumed, Mike will enjoy 15 units of happiness.

If the price of each order of chips rises to $10 while the price of each burger remains at $5. If Mike has $30, then how many burgers should he buy (the first number listed) and how many chips should he order (the second number listed) in order to maximize his happiness?

6 burgers, 0 chips

0 burgers, 3 chips

4 burgers, 1 chips

2 burgers, 2 chips

None of the Above