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1. Larry decided to relocate to Germany. Larry hired Happy Homes, Inc. to find a buyer and
contract for the sale of his house in the U.S. The agency relationship between Larry and
Happy Homes must be evidenced with a written agreement.
Answer: True
2. If Denise is hired to work as a cashier, she has the implied authority to do acts reasonably
necessary to carry out her job.
Answer: True
3. Erica's supervisor told her to arrange for a conference room at the Kelly Inn. Erica has
express authority to contract for the room.
Answer: True
4. An agent must obey all instructions of the principal.
Answer: False
5. Jolene hired Lacy to find a buyer for her house. Adam was interested in buying the house.
If both Jolene and Adam agree, Lacy, a real estate agent, may represent both parties.
Answer: True
6. As a general rule, an agent is liable on contracts entered into on behalf of a fully disclosed
Answer: False
7. You cannot be held liable for the actions of your agents if the agents are violating your
Answer: False
8. If apparent authority is present, the principal is liable for even the unauthorized acts of the
Answer: True
9. The bankruptcy of an agent automatically terminates an agency relationship.

Answer: False
10. Generally, either party to an agency relationship has the power to terminate it at any time.
Answer: True
11. Rob agrees to act as an agent for Diane in selling her car. Diane has a duty of loyalty to
Answer: False
12. Kaiya is a sales representative of TriColor. Kaiya owes a fiduciary duty to TriColor.
Answer: True
13. A principal must indemnify an agent for any expenses incurred in carrying out agency
responsibilities, but the principal will not be responsible for indemnifying an agent for any
unauthorized purchases.
Answer: False
14. If a principal accepts the benefits of a whole unauthorized contract, the principal is
deemed to have ratified the contract and is bound as if the act had been originally authorized.
Answer: True
15. An agent is always liable for his or her own torts committed within the scope of the
agency relationship.
Answer: True
1. Which of the following persons is an agent?
a. Diane, a shoe salesperson for a retail store.
b. Tim, a real estate broker for a large real estate company.
c. Craig, a telephone marketing employee.
d. All the above.
Answer: D
2. Which of the following is not required of an agency relationship?

a. Consideration.
b. Fiduciary relationship.
c. Consent of the parties to act as agent or principal.
d. Control of principal over agent's conduct.
Answer: A
3. The equal dignities rule relative to agency law applies to an agent:
a. hired to contract for a booth at a trade show scheduled to occur in two years.
b. selling real estate for the principal.
c. authorized to enter into a two-year lease for her principal.
d. All the above.
Answer: D
4. Mohammad was an employee in the new product development department of Estay Inc.
Mohammad was directly involved in the development of a new product that Estay intended to
launch in 6 months. Estay took great care to keep information concerning the new product a
secret. Ceries, Inc., a competitor of Estay, persuaded Mohammad to leave Estay to direct
Ceries' marketing department. Which statement is correct?
a. Mohammad can share with Ceries the confidential information he knows about Estay's new
product because he was directly involved in its development.
b. Mohammad can share with Ceries the confidential information he knows about Estay's
new product because his agency relationship with Estay is terminated.
c. Mohammad cannot share with Ceries the confidential information he knows about Estay's
new product because of the equal dignities rule.
d. Mohammad cannot share with Ceries the confidential information he knows about Estay's
new product because he has a duty not to disclose confidential information he acquired
during the agency.
Answer: D
5. An agency relationship can be created:

a. by the conduct of the parties.
b. by an oral agreement in all circumstances.
c. only by a written agreement.
d. only by the meeting of all the standards of contract law.
Answer: A
6. Ron is the business agent for Kansas Sunshine, a rock band. He is also the agent for
another popular Midwestern rock group, City Sand. Ron negotiates a deal with a Kansas City
promoter to have City Sand play after a professional football game. The promoter was willing
to pay $250,000 for both groups to play after the game; however, Ron talked her into booking
just City Sand for $175,000. Given his contract with City Sand, Ron made more money under
this arrangement. Has Ron violated his fiduciary duty to Kansas Sunshine?
a. Yes. It appears that Ron put his own interests ahead of his principal's interests.
b. Yes. Ron cannot, under any circumstances, act as an agent for both groups.
c. Both a and b are correct.
d. Neither a nor b is correct since it is very common for rock band agents to represent several
groups at the same time.
Answer: A
7. John hired Tim to sell his house. Which statement is correct?
a. John is Tim's principal.
b. Tim, but not John, can terminate the agency.
c. This illustrates a power coupled with an interest.
d. All the above are correct.
Answer: A
8. Nikki was an tax accountant with HBR Accounting. Nikki decided to do some tax
consulting in the evenings and on weekends. HBR is unaware of Nikki's consulting work.
Which statement is correct?

a. Nikki has not breached a fiduciary duty to HBR since her consulting is done after her work
for HBR.
b. Nikki has not breached a fiduciary duty to HBR since her behavior does not reflect badly
on the accounting firm.
c. Nikki has not breached a fiduciary duty to HBR since Nikki has a contractual relationship
with her clients, not her employer.
d. Nikki has breached a fiduciary duty to HBR since she is competing with HBR.
Answer: D
9. The doctrine of estoppel would most often apply in situations of:
a. implied authority.
b. apparent authority.
c. transaction authority.
d. actual authority.
Answer: B
10. Cameron, editor of the local newspaper, assigned to Jim the writing of a story about
pollution of a nearby stream. Although Jim used reasonable care in gathering and checking
his information, unknown to Jim, the story contained a defamatory statement about Maureen.
Maureen reads the story and sues Jim for libel. Cameron, who read and published the story:
a. must indemnify Jim for Maureen’s claim.
b. need not indemnify Jim for Maureen’s claim because Jim should have checked his facts
more carefully.
c. need not indemnify Jim for Maureen’s claim because Jim breached his duty to obey
d. can recover damages from Jim for any injury to the newspaper resulting from Jim’s story.
Answer: A
11. An agent may not engage in inappropriate behavior that reflects badly on the principal.
This rule applies to conduct:

a. during working hours.
b. during off-duty time.
c. during both working hours and off-duty time.
d. only by public officials.
Answer: C
12. Pamela hired Lena to sell her business. Lena:
a. can buy the business as long as the price is fair.
b. can buy the business as long as she qualifies for financing.
c. can buy the business only with Pamela's permission.
d. cannot buy the business under any circumstances.
Answer: C
13. An agency will be terminated in all but which one of the following situations?
a. The principal and agent agree on an agency relationship to sell a boat, and the boat is sold.
b. A travel agent files for individual bankruptcy under Chapter 13.
c. The agent violates his duty of loyalty.
d. An electrician, an agent of a contractor, has her license revoked.
Answer: B
14. Janet was employed as a sales representative for Esday, Inc. An appreciative customer
gave her a diamond bracelet for all her hard work on a complicated contract. Can Janet keep
the bracelet?
a. Yes. The bracelet was given to Janet personally and intended for her.
b. Yes, but only if she discloses the gift to Esday and Esday consents to her keeping the
c. No. An agent is not allowed under any circumstances to personally profit as a result of the
agency relationship.

d. No. The bracelet is regarded as an unfair trade practice and violates antitrust law.
Answer: B
15. Chance is a traveling marketing representative for a publishing company. He is an
independent contractor. One afternoon while driving to a meeting, he negligently runs a stop
sign and causes an accident. Judy is injured. Judy can:
a. hold both Chance and his company liable for her injury.
b. hold the company but not Chance liable.
c. hold Chance but not the company liable.
d. not hold Chance or his company liable for her injury.
Answer: C
16. Mrs. O'Leary hired Jenna to sell her house in Michigan. She executed a power of attorney
in favor of Jenna authorizing her to do "anything and everything associated with the sale of
real estate, acting as a prudent person." On May 30, Jenna finalized a deal with Brandon for
the purchase of the house. Brandon and Jenna signed the real estate contract that day. Jenna
learned the next day that Mrs. O'Leary had died May 29.
a. The contract is void since the agency terminated May 29.
b. The contract is valid since the agency’s purpose was achieved before Jenna was notified of
Mrs. O'Leary's death.
c. The contract is voidable at the option of Mrs. O'Leary's estate.
d. The contract is voidable at the option of Brandon.
Answer: A
17. Jim agreed to show Donna's car to a potential buyer. Donna was not able to be home since
she had to attend a meeting. After showing the car, Jim left the keys in it and the car was
stolen. Which statement is correct?
a. Since Jim is a gratuitous agent, he will only be liable for the loss of the car if his conduct
constitutes gross negligence.

b. Since Jim is a gratuitous agent, he will be liable for the loss of the car if his conduct
constitutes ordinary negligence.
c. Since Jim is a gratuitous agent, he has no liability for the car.
d. Since Jim is a gratuitous agent, he is strictly liable for the loss of the car.
Answer: A
18. Tom, the production manager at Esday, was told by his supervisor to hire Elton, a 15year-old, to operate an industrial machine. Hiring the 15-year-old violates the child labor
laws. Tom:
a. should hire Elton. Tom has a duty to obey Esday's instructions.
b. should hire Elton. Tom has a duty of care to ensure that the government does not discover
that Elton is 15 years old.
c. should not hire Elton. Tom has a duty of care and he would not be caring for Elton.
d. should not hire Elton. Tom has a duty to obey Esday's instructions only if they are legal
and ethical.
Answer: D
19. If the agent is disloyal to the principal:
a. the agency agreement automatically terminates and the principal may rescind the
b. the principal has the right to collect any actual damages sustained as a result of the agent's
c. the principal has a right to recover any profits earned as a result of his agent's disloyal
d. All the above are correct.
Answer: D
20. Linda borrowed $2,500 from Tonya. They agreed that Tonya could take a grouping of
Linda's antiques as collateral. If Linda could not pay, then Tonya could sell the antiques to
recover her money. When Linda could not pay off the loan, Tonya sold the antiques and paid

Linda the proceeds after deducting the balance of the loan. Which of the following statements
is correct?
a. This is an irrevocable agency relationship.
b. This is a power coupled with an interest.
c. Linda has neither the power nor the right to terminate the relationship.
d. All the above are correct.
Answer: D
21. HBR Accounting hired Denise, a CPA, to prepare tax returns. Which statement is correct?
a. Denise is a gratuitous agent and has a duty not to commit gross negligence.
b. Denise is an agent and has a duty not to commit ordinary negligence.
c. Denise, as a CPA, is an agent with special skills. She is held to a higher duty than ordinary
d. Denise, as a CPA, is an agent with special skills. She is held to a lower standard than
ordinary negligence.
Answer: C
22. Express authority can be created by:
a. words spoken directly to the agent.
b. conduct.
c. written words given to one person to give to another person, the agent.
d. All the above.
Answer: D
23. Circus Pizza contracted with Art to run its birthday parties. Art's responsibilities included
supervising the children and organizing the games. Circus did not investigate Art's
background, which included a history of assaulting children. Art assaulted a 7-year-old girl in
the restaurant's kitchen during a birthday party. Circus Pizza:
a. cannot be liable for the damages because Art committed an unforeseeable intentional tort.

b. cannot be held liable for the damages because Art's conduct was not in the scope of
c. may be held liable on the basis of negligent hiring.
d. may be held liable only if Circus actually knew of Art's background.
Answer: C
24. When a principal is partially disclosed:
a. the agent and principal will be jointly and severally liable on the contract.
b. the agent and principal will be only jointly liable on the contract.
c. only the principal can be liable.
d. only the agent is liable.
Answer: A
25. Factors influencing whether a servant is acting within the scope of employment include
all but which of the following?
a. The act is similar to the one the principal authorized.
b. The act is not seriously criminal.
c. The act took place during hours that the servant is generally employed.
d. All of the answer choices are factors in determining if an act is “within the scope of
Answer: D
1. Alex worked for years for MegaCorp. During his employment with MegaCorp, he learned
a great deal of confidential information and knew that if this information got into the hands of
competitors or the general public, MegaCorp could suffer great business losses. Alex claims
that he was wrongfully fired by MegaCorp and accordingly he believes he has no obligation
to MegaCorp to keep any information he acquired with them as confidential. MegaCorp
claims that Alex is under a continuing duty to keep confidential information secret, even
though he is no longer with the company. Who is right? Why?

Answer: MegaCorp. Regardless of why Alex no longer works for MegaCorp, he is under a
continuing duty not to use or disclose the company's confidential information after he leaves
the company. A company's trade secrets and other confidential information may not be used
by any person without the express authority of the owner of such property rights. Alex had a
fiduciary duty of loyalty to his employer when he worked for it and such duty does not
terminate relative to trade secrets or confidential information after he is no longer employed
by that company.
2. A principal is bound by contracts that an agent enters into with authority. Discuss the
various types of contractual authority an agent may have.
Answer: Authority is the legal ability of an agent to bind a principal. The types of authority
include: express, implied, and apparent authority. Express Authority is when the principal, by
words or conduct reasonably interpreted, actually gives the agent the authority. Implied
Authority is the authority to do the things reasonably necessary to carry out the expressly
authorized tasks. Apparent Authority arises when the principal does something to make a
third party believe that a person has authority to act. Express and implied authority are
categories of actual authority. In apparent authority, the principal is liable for the agent’s
actions even though the agent was not authorized.
3. Barnett was orally hired by Paula to locate desirable real estate that she could use for rental
property. She stated she wanted to find a four-plex that could be purchased for under
$200,000 that could be rented for at least $1,000 per month per unit (which equates to $4,000
rental per month for the property). Barnett located a four-plex that could be purchased for
$160,000 and was renting for $1,200 per unit. It was such a good deal that he purchased it for
himself. About two months later he found a second property that was listed for $199,000 and
rented for $1,000 per unit. Paula purchased the property. Afterwards, she learned that Barnett
had bought the $160,000 four-plex for himself without telling her about it. Paula believes that
Barnett has acted improperly. Barnett claims that he did what she asked -- he found a
property for under $200,000 that rented for $1,000 per unit. He also claims that since their
agreement was oral, he has a legal defense if she pursues the matter in court. Does Paula have
any legal recourse against Barnett? Explain.
Answer: Yes. Barnett violated his fiduciary duty to Paula when he purchased the $160,000
property for himself. He was under a duty to inform Paula about the property and give her an
opportunity to purchase it before buying it for himself. An agent has a duty of loyalty to his

principal as well as a duty to fully disclose any information he has acquired during the agency
to his principal. The agent also has a duty to follow instructions. The self-dealing on the part
of Barnett violates the very spirit of the agency relationship and Paula has a legal right to
collect money damages from Barnett. Since Barnett's act was intentional, Paula may also seek
punitive damages in addition to compensatory damages from the disloyal agent.
Barnett may have a legal defense to the claim if the authority to act was not evidenced in
writing. The equal dignities rule requires that the agent have written authority to act for the
principal if the transaction is subject to the statute of frauds. It appears, however, that since
Barnett was empowered to find real property, not to buy it for Paula, that a written agreement
may not be necessary for Paula to prevail.
4. Andrew has been hired to do some work for Rossi Enterprises. What factors would a court
consider in determining if Andrew is an employee or an independent contractor? Why does
the designation matter?
Answer: In determining if agents are employees or independent contractors, courts consider
whether: the principal controls the details of the work; the principal supplies the tools and
place of work; the agents work full-time for the principal; the agents are paid by time, not by
the job; the work is part of the regular business of the principal; the principal and agents
believe they have an employer-employee relationship; and the principal is in business. The
distinction affects the potential liability of the principal. A principal may be liable for the torts
of an employee or servant, but generally is not liable for the torts of an independent
contractor. A principal also has greater responsibility for employee benefits and tax
withholding for employees than for independent contractors.
5. Betsy's elderly father gave her written authority her to sell the family house. Her father
lived in Arizona and she lived in Minnesota. After about two months she found a buyer for
the house and signed an acceptance of the offer on March 21. Later that same day she learned
her father had died the day before (March 20). Other members of the family did not want the
family house sold and claimed that the acceptance Betsy signed was void. The buyer of the
house claims Betsy had the legal authority to sell the house and that the contract is binding.
Who is right?
Answer: The contract is void since Betsy's authority to act for her father terminated at the
moment he died. An agent only has the power to perform acts that the principal could do
himself. Accordingly, once a person dies, his capacity to contract terminates at that time.

Since Betsy's father could not have contracted to sell the house at the time Betsy signed the
acceptance of the offer, Betsy, as her father's agent, had no capacity to do so either.
6. Grant is a delivery person for Watkins Furniture. One day, after delivering a chair to
Nadine’s house, he stopped at a fast food restaurant to get a sandwich at the drive-through
window. As he was leaving the parking lot, he accidentally hit the rear of Blanche’s car.
Discuss the possible liability of Watkins for Grant’s accident. Would there be any difference
in the potential liability of Watkins if Grant had the accident after driving 30 miles away to
visit a friend?
Answer: The major issue here is abandonment. Watkins is liable for the actions of its
employee that occur while the employee is at work, but not for actions that occur after the
employee has abandoned the principal’s business. Here, the accident at the local restaurant
would probably result in liability for Watkins because Grant would likely be considered to
simply be on a detour from company business. If Grant had driven 30 miles away to visit a
friend before having the accident, Watkins would probably not be liable. Grant would
probably be considered to be “off on a frolic of his own” and therefore not acting within the
scope of his employment at the time of the accident.

Test Bank For Introduction to Business Law
Jeffrey F. Beatty, Susan S. Samuelson

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