Question

a. shareholders in a corporation must pay some but not all of the liabilities of the firm.
b. corporations have limited accountability for their debts and obligations.
c. corporations have only limited responsibility for their actions.
d. shareholders in a corporation cannot lose more than their investment in the firm.
the government grants limited liability to the owners of corporations
a. to limit shareholder risk and thus encourage investment in corporations.
b. because the owners do not run the corporation and thus should not be responsible for its debts.
c. to allow the corporation to borrow money in the form of bonds
d. to make market economies more equitable and efficient.
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
a. investors that make a small investment in a firm may be unwilling to risk all their personal assets if the firm fails.
b. investors that have a large investment and who can exercise control in the firm, do not want to be responsible for the firms debts.
c. the shareholders are usually very confident that the firm they have invested in is not at risk to fail.
d. investors that make a small investment in a firm are willing to risk all their personal assets if the firm fails.

Explanation:

• First question: Limited liability means shareholders' liability is restricted to their investment. Option D correctly states that shareholders in a corporation cannot lose more than their investment in the firm. Options A is incorrect as shareholders don't pay firm's liabilities. Option B is wrong as it's shareholders' liability that's limited, not corporation's accountability for debts. Option C is incorrect as it's about liability for debts (not actions in general).
• Second question: The government grants limited liability to limit shareholder risk (so they invest more). Option A is correct. Option B is wrong as owners can run the corporation. Option C is incorrect as it's not the main reason (borrowing via bonds is a consequence, not the reason for granting limited liability). Option D is too broad (not the direct reason related to limited liability).
• Third question: For firms raising funds from many investors (many with small investments), investors with small investments won't risk all personal assets. Option A is correct. Option B is about large - investment investors (not relevant to the "large number of investors" context). Option C is incorrect as confidence in firm not failing isn't the reason for limited liability's importance. Option D is the opposite of what's true (small - investment investors don't want to risk all personal assets).

Answer:

1. D. shareholders in a corporation cannot lose more than their investment in the firm.
2. A. to limit shareholder risk and thus encourage investment in corporations.
3. A. investors that make a small investment in a firm may be unwilling to risk all their personal assets if the firm fails.