Holt 7525-9 S15_IT

For financing needs, proprietorships and partnerships rely mainly on self-financing and loans from
financial institutions. Corporations can issue shares of stock (ownership interests) or sell bonds
(debt) for financing. These additional sources of financing make it possible for corporations to
become extremely large.
Nonprofit firms have no residual claimants. The absence of residual claimants is likely to lead to;
(1) employees engaging in more shirking in nonprofit firms than in profit-seeking firms, and (2) top
managers spending any excess funds within the firm to benefit themselves. A private nonprofit
firm is financed by the voluntary actions of private individuals (consumers and contributors). A
public nonprofit firm is financed by involuntary contributions (taxes). A private nonprofit firm is
more likely to be responsive to consumer demand than is a public nonprofit firm.
Questions for Chapter 19
Fill-in-the-blanks:
1. A ______________________ is an entity that employs resources to produce goods and
services.
2. ______________________ costs are the costs of bringing buyers and sellers together for
exchanges.
3. ______________________ is measured as output per unit of input.
4. ______________________ is avoiding the performance of an obligation.
5. A ______________________ is a firm owned and operated by one individual.
6. A ______________________ is a firm owned and operated by two or more co-owners.
7. A ______________________ is an organization owned by stockholders that is
considered a legal person, separate from its owners.
8. The ______________________ ______________________ of a firm is equal to the
firm’s assets minus its liabilities.
Multiple Choice:
___ 1. Firms may be able to produce more efficiently than households because:
a. firms can increase transaction costs
b. team production may be more productive than individual production
c. firms own most resources
d. All of the above
___ 2. Team production may be more productive than individual production because:
a. team production allows for specialization of labor
b. team production allows for extensive use of capital
c. team members are less likely to engage in shirking
d. Both a. and b. above
___ 3. A manager who is a residual claimant:
a. is more likely to shirk than a manager who is not a residual claimant
b. is entitled to receive a share of the firm’s profits
c. is more likely to be diligent to monitor shirking
d. Both b. and c. above
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19 - 11 The Firm