The Limited Liability Rule Means That If a Corporation Goes

question 119

Multiple Choice

The limited liability rule means that if a corporation goes bankrupt:

• A) Shareholders are responsible for all the debts of the firm
• B) Bondholders are responsible for all the debts of the firm
• C) Shareholders can only lose the amount they invested
• D) Bondholders only lose the face value of the bond

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Definitions:

Fixed Costs

Costs that do not vary with the level of production or sales, such as rent, salaries, and insurance.

Variable Costs

Costs of production that vary with the level of output, such as raw materials and labor expenses.

Temporarily

For a limited period of time; not permanent.

Short-Run Profits

Earnings that a company makes over a short period of time, not taking into consideration the full costs of production in the long term.