BUSINESS-ENVIRONMENT-AND-CONCEPTS Online Practice Questions and Answers

Correct Answer: B

Choice "b" is correct. The bylaws are adopted by the incorporators or directors, are not required to be filed, and generally will contain rules desired regarding the operation of the corporation. Choice "a" is incorrect. Articles of incorporation are filed with the state and contain information regarding the formation of the corporation. Choice "c" is incorrect. A certificate of authority is filed with the foreign state that a business wishes to do business in and with permission from that state. Choice "d" is incorrect. A shareholder agreement is a contract between shareholders for any rights or duties agreed upon between the parties.

Correct Answer: D

Choice "d" is correct. The peak of a business cycle marks the highest point of economic activity. At that

point, firms are likely to face capacity constraints and labor shortages, which will put upward pressure on

the overall price level.

Choice "a" is incorrect. Real GDP is likely to be above, not below, its potential level.

Choice "b" is incorrect. Business inventories are likely to be low, not high, and there is likely to be excess

demand for labor not an excess supply of labor.

Choice "c" is incorrect. The overall price level is likely to be rising not falling.

Correct Answer: B

Choice "b" is correct. A natural monopoly exists when economic and technical conditions permit only one

efficient supplier.

Choice "a" is incorrect. Owning natural resources, even if they are unique, would not create a monopoly.

Substitutes for the resource may be available.

Choice "c" is incorrect. Government control may create a monopoly, but not a natural monopoly. This is a

regulated monopoly.

Choice "d" is incorrect. Barriers to entry help create a monopoly, but the product must be unique.

Correct Answer: D

Choice "d" is correct. Firms produce up to the point where marginal cost equals marginal revenue, whether the markets are perfectly competitive or imperfectly competitive. Choice "a" is incorrect. Very close, but it's actual marginal revenue, not price. It is assumed that revenue is not fixed on a unit basis. Choice "b" is incorrect. Beyond the point of average costs being minimized, marginal cost will rise. Still, it will make sense to increase production until marginal cost equals marginal revenue. Choice "c" is incorrect. Marginal revenue, not price, as revenue is assumed to vary on a per unit basis, and not average cost, since it will increase profits to expand production until marginal revenue equals marginal cost.

Correct Answer: D

Choice "d" is correct. Product demand is more elastic when more substitutes are available.

Choice "a" is incorrect. The longer the time period, the more product demand becomes elastic because

more choices are available.

Choice "b" is incorrect. Product demand is more elastic when more substitutes are available, not fewer

substitutes.

Choice "c" is incorrect. Product demand is more inelastic when few substitutes are available.

Correct Answer: C

Choice "c" is correct. A city ordinance that freezes rent prices (such as rent control and rent stabilization in New York City) may cause the quantity demanded for rental space to exceed the quantity supplied. This occurs if the rent controlled price is set below the market clearing price. At the controlled price, the quantity supplied will be constrained due to the low rent prices for the rent-controlled and rent-stabilized properties; builders will not want to build and rent properties for less than they are worth on the open market. The quantity demanded for the rental space will still be artificially high due to the city ordinance, which sets the controlled price below the market price. Thus, the quantity demanded will exceed the quantity supplied. New York City rent control is a perfect example of the effect of a price ceiling and the problems that it can cause. Choice "a" is incorrect. A city ordinance that freezes rent prices will not cause the demand curve for rental space to fall. Price changes cause movements along the demand curve, not shifts in the demand curve. Choice "b" is incorrect. A city ordinance that freezes rent prices will not cause the supply curve for rental space to rise. Price changes cause movements along the supply curve, not shifts in the supply curve. Choice "d" is incorrect. A city ordinance that freezes rent prices will not cause the quantity supplied to exceed the quantity demanded. This choice is backwards.

Correct Answer: A

Choice "a" is correct. Historical weighted average cost of capital is usually used as the target or hurdle rate

in the residual income approach.

Choices "b", "c", and "d" are incorrect, per the above definition.

Correct Answer: B

Choice "b" is correct. The payback method neglects total project profitability. It simply looks at the time

required to recover the initial investment; subsequent receipts are ignored.

Choice "a" is incorrect. Payback does not incorporate the time value of money.

Choice "c" is incorrect. Payback uses cash flow, not accrual accounting income.

Choice "d" is incorrect. The denominator is the annual cash inflows.

Correct Answer: C

Choice "c" is correct. The following are methods of converting accounts receivable (AR) into cash:

1.

Collection agencies - used to collect overdue AR.

2.

Factoring AR - selling AR to a factor for cash.

3.

Cash discounts - offering cash discounts to customers for paying AR quickly (or paying at all). For example: 2/10, net 30.

4.

Electronic fund transfers - a method of payment, which electronically transfers funds between banks.

Therefore, only choice "c" matches the above list.

Choice "a" is incorrect. Trade discounts offer discounts on future merchandise purchases offered to trade

customers. These discounts do not turn AR into cash.

Choice "b" is incorrect. Pledging AR as collateral on a loan does not convert AR into cash.

Choice "d" is incorrect, per choice for "a" above.

Correct Answer: C

Choice "c" is correct. $120,000 benefit on the planned change in credit standards.

This question pertains to the economic benefit associated with a change in credit terms.

The question tells us that the credit sales will increase by $720,000 if we relax our credit terms. We know

variable costs are 80%, so we will earn $144,000 as a result of the expanded sales. The 20% contribution

margin is equal to the 20% opportunity cost so there is no better investment of our resources for the

expanded credit sales relative to its margin.

What about the variable costs, though?

We have $576,000 in variable costs that will be outstanding, pro rata, 75 days of the year. So the

resources we will use to produce our sales is 75/360ths of $576,000, or $120,000 at any given time during

the year. These $120,000 in resources could earn 20% annual return or $24,000. The $24,000 opportunity

cost, compared to the $144,000 margin results in a $120,000 benefit in relaxing credit terms.

Choices "a", "b", and "d" are incorrect, per the above calculation/discussion.