University of Washington - AP 100Econ stydy plan for exam 2 A*

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The three major types of firms in the United States are called Sole proprietorships, partnerships, and corporations Limited liability means that Shareholders in a corporation cannot lose more than ... their investment in the firm The government grants limited liability to the owners of corporations To limit shareholder risk and thus encourage investment in corporations Limited liability becomes more important for firms trying to raise funds from a large number of investors, rather than from a small number of investors, because Investors that make a small investment in a firm may be unwilling to risk all their personal assets if the firm fails What do we mean by the separation of ownership from control in large corporations? Shareholders own the corporation, but it is controlled by managers How is the separation of ownership from control related to the principal-agent problem? The agents (managers) may pursue their own interests rather than the interests of the principals (shareholders) Suppose that shortly after graduating from college you decide to start your own business. Assuming you are starting a small business and want it to be your business a lone which category of firm are you most likely to start? Sole proprietorship An article discussing the reasons that the Connecticut state legislature passed a general incorporation law in 1873 observes that prior to the passage of the law, investors were afraid that large businesses "were not a safe bet for their money." The author argues that investors' fear was because prior to the passage of the law, Owners of all businesses established in Connecticut had unlimited liability I would like to invest in the stock market, but I think that buying shares of stock in a corporation is too risky. Suppose I buy $10,000 of Twitter stock, and the company ends up going bankrupt. Because as a stockholder, I'm part owner of the company, I might be responsible for paying hundreds of thousands of dollars of the company's debts. This statement is: False because shareholders are not liable for the debts of a corporation "Family-run companies ... could not raise sufficient capital to exploit the large-scale opportunities tied to the rise of the steam engine, notably railways and (with limited exceptions) global shipping and automated manufacturing." How did the United States solve the problem of firms raising enough funds to operate railroads and other large-scale businesses? To help firms raise enough funds to operate railroads and other large-scale businesses, the United States Passed general incorporation laws which limit the liability of owners in corporations Two economists at the Brookings Institution argue that "new firms rather than existing ones have accounted for a disproportionate share of disruptive and thus highly productivity enhancing innovations in the past—the automobile, the airplane, the computer and personal computer, air conditioning, and Internet search, to name just a few." New firms might be more likely than older firms to introduce "disruptive" innovations because new firms [Show More]

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