Although your answers need not be lengthy (generally, 1-2 short paragraphs is fine), you should be careful to respond to all parts of the question asked. It is very important that your answers demonstrate that you have made the effort to read the chapter that relates to the question and thoroughly studied the relevant topic. Answers should be submitted in complete sentence and paragraph form, and writing presentation is important.
Please remember that late essay questions are NOT accepted.
1. Larry, Moe and Curly decide to start a business selling used cars together. (3 points)
a. Discuss the advantages and disadvantages of operating the business as (1) a partnership and (2) a corporation, with respect to each of the following issues:
1. Formation and Operation
2. Centralization of Management
3. Transferability of Interests
4. Extent of Personal Liability
5. Tax Considerations
b. The three figure that with Moe’s management experience, Larry’s salesmanship and Curly’s vast fortune, they have the makings for a successful business. Moe and Larry would run the day to day operations and manage the business, while Curly would supply the capital and stay out of management. Further, Curly wants to limit his personal liability to the amount he will invest in the company and does not really care what the tax consequences are. Based on these facts, which form of organization would be best for these guys and why?
2. As the CEO of Mudcat Corporation, you are concerned about the possibility of a hostile takeover of your corporation by a corporate raider. What steps or defensive measures might you put in place to defend Mudcat Corporation (and your position as CEO) against such a bid? (1 point)
3. Consider a firm which uses one fixed input and one variable input. (1 point)
a. Explain how this firm’s TC, TVC and TFC curves will be affected by a government tax on the fixed input.
b. Explain how this firm’s TC, TVC and TFC curves will be affected by a government tax on the variable input.
4. Can a firm’s average variable costs be falling if they are less than the firm’s marginal costs? Explain. (1 point)
5. Explain why a firm must consider variable costs, rather than fixed costs, when deciding whether to produce. (1 point)
6. Explain the circumstances under which a firm will produce output while incurring a short-run loss, and the circumstances under which it will shut down while incurring a short-run loss. (1 point)
7. Explain why a firm would maximize profits by producing output up to the point at which MR = MC. (1 point)
8. Explain the externality argument for government regulation of the environment. Describe a policy the government could adopt that would reduce pollution, but not require estimation of the optimal pollution tax. (1 point)
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