What is the rationale behind a tradable emissions allowance scheme?
a. to create a market for externalities: the scheme brings together buyers and sellers of marketable permits
b. to raise revenue for the government through the sale of emission permits and at the same time set an emissions target
c. to provide firms with the incentive to consider less costly alternatives to pollution reduction by making firms pay for the right to pollute beyond their specified allowance
d. to discipline polluting firms by specifying the maximum amount of emissions allowed and giving them permits to pollute up to their allowance

Unit 2 Examination
Multiple Choice Questions (Enter your answers on the enclosed answer sheet)
1) What type of business is the easiest to set up?
a. a partnership
b. a sole proprietorship
c. a corporation
d. all types of business require the same amount of effort and expense.

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2) Which type of business has the most government rules and regulations affecting it?
a. a corporation
b. a partnership
c. a sole proprietorship
d. All types of business have the same set of rules and regulations.

3) Who controls a sole proprietorship?
a. bondholders
b. the sole proprietor
c. stockholders
d. All of above

4) Jeremy is thinking of starting up a small business selling NASCAR memorabilia. He is considering setting up his business as a sole proprietorship. What is one advantage to Jeremy of setting up his business as a sole proprietorship?
a. As a sole proprietor, Jeremy would face limited liability.
b. As a sole proprietor, Jeremy would have both ownership and control over the business.
c. As a sole proprietor, Jeremy would have the ability to share risk with shareholders.
d. All of the above would be advantages of setting up his business as a sole proprietorship.

5) Which of the following is not an advantage of starting a new business as a corporation?
a. separation of ownership and business liability
b. ability to share risks
c. possibility of double taxation
d. enhanced ability to raise funds

6) Who operates and controls a corporation in its day-to-day activities?
a. the employees
b. the board of directors
c. the corporation’s management
d. the stockholdersUnit 2 Examination 102 Principles of Economics

7) What do economists call a situation where a hired manager does not have the same
interests as the owners of a business?
a. a financial intermediary problem
b. the financial problem
c. conquest and control
d. a principal-agent problem

8) Which of the following does not take place in the direct finance market?
a. Corporate bonds are sold to savers.
b. Deposits from savers are accumulated and loans made to borrowers.
c. Ownership in corporations is sold in the form of common stock.
d. Ownership in corporations is sold in the form of preferred stock.

9) If a corporation earns a profit, how do owners of the firm share in the profit?
a. by raising the interest rate on bonds
b. dividend payments on shares of that firm’s stock
c. coupon payments on that firm’s bonds
d. by selling any bonds or stocks owned and realizing a capital gain

10) If a corporation retains all its profits and distributes none of the profit to owners, how
can owners benefit?
a. If the retained earnings are expected to create future profits, the market price of the firm’s stock will increase and create a capital gain for stockholders if the stock is sold.
b. Owners will only benefit if some profits are paid out in the form of dividends.
c. Shares of stock can be converted into bonds so stockholders will be able to earn coupon payments.
d. The owners’ federal income tax liability is reduced by their share of the corporation’s retained earnings.

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