Legal Environment Final Exam questions
and answers 2025\2026 A+ Grade
Sarah owns Fine Cuts hair salon. Hairdressers each rent a chair in the salon where they can style
customers' hair, and Sarah provides receptionist services, maintains the space, and sells some hair care
products at the front of the salon. The hairdressers must pay 35 percent of their profits to Sarah in
return for the chair space and earn a commission for each hair product that they sell. Is Sarah selling the
hairdressers a security in Fine Cuts?
- correct answer No, the hairdressers are not expecting to earn money predominately from Sarah's
efforts
Jeremy is a doctor who would like to be able to provide low cost medical care to underprivileged
families. Jeremy and two nurses form Medicine for All and file a registration statement and prospectus
with the SEC. The prospectus states that Medicine for All is looking for funding for the salaries of Jeremy
and the nurses and medical supplies and that the organization will earn little profits. Will the SEC allow
Medicine for All to sell its securities?
- correct answer Yes, provided all of the required disclosures are made clearly
In the registration statement filed with the SEC, DrugsUSA stated that it had three different medicines
approved by the Food and Drug Administration (FDA). In reality, DrugsUSA had filed applications for
approval with the FDA that were still pending. The SEC approved the sale of DrugsUSA stock, and
Marilyn purchased $100,000 worth of stock. Two months later, all three of DrugsUSA's applications were
denied by the FDA. The stock price plummeted, reducing the value of Marilyn's shares to a total of
$2,000. What, if anything, can Marilyn recover?
- correct answer Marilyn can recover $98,000 from DrugsUSA and the signatories of the registration
statement.
Company A completes its initial public offering (IPO) and complies with all of the 1933 Act requirements.
Must Company A register with the SEC as a reporting company under the 1934 Act?
- correct answer Yes, because Company A has completed a public offering under the 1933 Act.
James, the CEO of a major restaurant chain, learns that he is about to be fired by the Board of Directors.
Furious, he writes a press release calling all of the company's executives "greedy scoundrels," and
stating that "whoever has to fill my shoes will have to answer to the shareholders for the financial mess
,that they have created." James had no actual knowledge of any financial mismanagement by the
company. The company's stock drops substantially in the few hours of trading that occur before the
markets close after James releases his statement. The next day, James issues an apology, saying
(truthfully) that his press release had no factual basis, and the stock recovers over the course of the
week. Is James liable for a securities law violation?
- correct answer Yes, James is liable for making an untrue statement of material fact
Through her job as a paralegal at the Attorney General's office, Charlotte learns that MegaCorp has been
defrauding its customers. Although the information is highly confidential, Charlotte shares it with her
mother and asks her not to tell anyone. Charlotte's mother does not disclose the secret, but she does
sell her stock in MegaCorp. Has Charlotte's mother committed a violation of securities law?
- correct answer Yes, Charlotte's mother has committed insider trading by misappropriation
Bobby works as a janitor for a large office building. One night when emptying the recycling bins in the
offices of Big Co., Bobby sees a memo marked "Confidential - Eyes Only" on the top. Curious, Bobby
reads the memo and learns that Big Co. is closing half of its juice manufacturing plants in the U.S. and
laying off 2,000 employees. At the end of his shift, Bobby tells this to his supervisor and good friend who
promptly sells her stock in Big Co. the next day. Is Bobby liable for insider trading?
- correct answer Yes, as a tipper.
After acquiring the RazRSleek brand name and electric shaver assets, Flyy controlled 55 percent of the
electric shaver industry in the United States. Chaser, a competitor, claimed that the acquisition of such a
large market share was a violation of the law because the increased competition from Flyy would
decrease Chaser's profits. Does Chaser have a valid claim?
- correct answer No, unless Flyy excluded competitors and controlled prices.
Smalltown has two family-owned hardware stores that have been in business for years. Major Hardware
opens one of its superstores in Smalltown, advertising extremely low prices, which are at below cost.
Because Major owns stores nationally, it is able to keep prices extremely low until it forces both of the
family-owned stores out of business. Once Major is the only hardware store in town, it raises its prices
enough to make up for its former losses and to make some additional profit. Has Major violated any
antitrust laws?
- correct answer Yes, Major has engaged in predatory pricing
Paul's Pen Co. manufacturers and sells an inexpensive ball-point pen. Stacy's Stationery purchases the
pens for $.25 each in quantities of 1,000. Stacey's discovered that a national chain, a competitor of
Stacey's, buys the pen at $.20 for 1,000. If Stacy's Stationery sues Paul's Pen Co. for price discrimination:
- correct answer Stacy's Stationery will win unless Paul's Pen Co. can justify the price differential.
, Jane's Boutique would like to buy some of Holistic Health Co.'s popular nail polish for resale. Holistic
Health tells Jane that if she buys less than 100 units, she must also buy a small order of their new
vitamin product. Jane has no interest in selling vitamins in her boutique. If Jane wanted to challenge
Holistic Health's requirement as an illegal tying arrangement, what additional facts would she have to
prove?
- correct answer Holistic Health has significant power in the nail polish market and is shutting out a
significant portion of the vitamin market through the tying arraignment
Advertisements for Clean Mouth mouthwash claimed that it was as effective as flossing in preventing
tooth plaque and gum disease. This statement was true, but only if the flossing was done incorrectly. In
fact, many consumers do floss incorrectly. Is this advertisement deceptive?
- correct answer Yes, because Clean Mouth omitted important information from its claim.
Baker George took orders for his famous Christmas Fruitcake. His ad demanded that orders must be
placed two months prior to delivery. However, this year, George received three times his usual number
of orders. In mid-October, George knew that he could not make on-time deliveries. Which of the
following is true?
- correct answer George has to notify customers and ask if they still want their fruitcake
In 2012, Donny wanted to get a loan to buy a house but was told that his credit scores were bad. Which
of the following, if distributed via his credit report, is NOT in violation of the FCRA?
- correct answer A note claiming that five businesses sought Donny's credit score in 2010
Gerald wants to buy a new digital camera, and he sees an ad for a PicturePerfect Model A digital camera
at a 25 percent discount at Bull's Eye—a large department store. Gerald goes to Bull's Eye the following
day, but the store clerk tells him that they are out of that particular camera. The clerk suggests that
Gerald purchase the PicturePerfect Model B camera instead. Even though the Model B is not on sale, the
clerk insists it is worth it because the camera takes much better pictures and "will not break in a year,
like the flimsy Model A cameras." Has Bull's Eye committed an FTC violation?
- correct answer Yes, this is a bait-and-switch scheme.
Molly ordered a custom-made plaque online from Master Woodwork, Inc., for her niece's college
graduation. Master Woodwork promised that the plaque would ship on or before April 15, which meant
it would arrive in plenty of time for the graduation on May 1. On April 1, Master Woodwork notified
Molly that the shipment would be delayed until April 22. Molly did not respond because she was sure
the plaque would still in arrive in time for the graduation. Master Woodwork sent Molly an e-mail on
April 20 stating that the plaque would be shipped on April 30. Frustrated, Molly deleted Master
and answers 2025\2026 A+ Grade
Sarah owns Fine Cuts hair salon. Hairdressers each rent a chair in the salon where they can style
customers' hair, and Sarah provides receptionist services, maintains the space, and sells some hair care
products at the front of the salon. The hairdressers must pay 35 percent of their profits to Sarah in
return for the chair space and earn a commission for each hair product that they sell. Is Sarah selling the
hairdressers a security in Fine Cuts?
- correct answer No, the hairdressers are not expecting to earn money predominately from Sarah's
efforts
Jeremy is a doctor who would like to be able to provide low cost medical care to underprivileged
families. Jeremy and two nurses form Medicine for All and file a registration statement and prospectus
with the SEC. The prospectus states that Medicine for All is looking for funding for the salaries of Jeremy
and the nurses and medical supplies and that the organization will earn little profits. Will the SEC allow
Medicine for All to sell its securities?
- correct answer Yes, provided all of the required disclosures are made clearly
In the registration statement filed with the SEC, DrugsUSA stated that it had three different medicines
approved by the Food and Drug Administration (FDA). In reality, DrugsUSA had filed applications for
approval with the FDA that were still pending. The SEC approved the sale of DrugsUSA stock, and
Marilyn purchased $100,000 worth of stock. Two months later, all three of DrugsUSA's applications were
denied by the FDA. The stock price plummeted, reducing the value of Marilyn's shares to a total of
$2,000. What, if anything, can Marilyn recover?
- correct answer Marilyn can recover $98,000 from DrugsUSA and the signatories of the registration
statement.
Company A completes its initial public offering (IPO) and complies with all of the 1933 Act requirements.
Must Company A register with the SEC as a reporting company under the 1934 Act?
- correct answer Yes, because Company A has completed a public offering under the 1933 Act.
James, the CEO of a major restaurant chain, learns that he is about to be fired by the Board of Directors.
Furious, he writes a press release calling all of the company's executives "greedy scoundrels," and
stating that "whoever has to fill my shoes will have to answer to the shareholders for the financial mess
,that they have created." James had no actual knowledge of any financial mismanagement by the
company. The company's stock drops substantially in the few hours of trading that occur before the
markets close after James releases his statement. The next day, James issues an apology, saying
(truthfully) that his press release had no factual basis, and the stock recovers over the course of the
week. Is James liable for a securities law violation?
- correct answer Yes, James is liable for making an untrue statement of material fact
Through her job as a paralegal at the Attorney General's office, Charlotte learns that MegaCorp has been
defrauding its customers. Although the information is highly confidential, Charlotte shares it with her
mother and asks her not to tell anyone. Charlotte's mother does not disclose the secret, but she does
sell her stock in MegaCorp. Has Charlotte's mother committed a violation of securities law?
- correct answer Yes, Charlotte's mother has committed insider trading by misappropriation
Bobby works as a janitor for a large office building. One night when emptying the recycling bins in the
offices of Big Co., Bobby sees a memo marked "Confidential - Eyes Only" on the top. Curious, Bobby
reads the memo and learns that Big Co. is closing half of its juice manufacturing plants in the U.S. and
laying off 2,000 employees. At the end of his shift, Bobby tells this to his supervisor and good friend who
promptly sells her stock in Big Co. the next day. Is Bobby liable for insider trading?
- correct answer Yes, as a tipper.
After acquiring the RazRSleek brand name and electric shaver assets, Flyy controlled 55 percent of the
electric shaver industry in the United States. Chaser, a competitor, claimed that the acquisition of such a
large market share was a violation of the law because the increased competition from Flyy would
decrease Chaser's profits. Does Chaser have a valid claim?
- correct answer No, unless Flyy excluded competitors and controlled prices.
Smalltown has two family-owned hardware stores that have been in business for years. Major Hardware
opens one of its superstores in Smalltown, advertising extremely low prices, which are at below cost.
Because Major owns stores nationally, it is able to keep prices extremely low until it forces both of the
family-owned stores out of business. Once Major is the only hardware store in town, it raises its prices
enough to make up for its former losses and to make some additional profit. Has Major violated any
antitrust laws?
- correct answer Yes, Major has engaged in predatory pricing
Paul's Pen Co. manufacturers and sells an inexpensive ball-point pen. Stacy's Stationery purchases the
pens for $.25 each in quantities of 1,000. Stacey's discovered that a national chain, a competitor of
Stacey's, buys the pen at $.20 for 1,000. If Stacy's Stationery sues Paul's Pen Co. for price discrimination:
- correct answer Stacy's Stationery will win unless Paul's Pen Co. can justify the price differential.
, Jane's Boutique would like to buy some of Holistic Health Co.'s popular nail polish for resale. Holistic
Health tells Jane that if she buys less than 100 units, she must also buy a small order of their new
vitamin product. Jane has no interest in selling vitamins in her boutique. If Jane wanted to challenge
Holistic Health's requirement as an illegal tying arrangement, what additional facts would she have to
prove?
- correct answer Holistic Health has significant power in the nail polish market and is shutting out a
significant portion of the vitamin market through the tying arraignment
Advertisements for Clean Mouth mouthwash claimed that it was as effective as flossing in preventing
tooth plaque and gum disease. This statement was true, but only if the flossing was done incorrectly. In
fact, many consumers do floss incorrectly. Is this advertisement deceptive?
- correct answer Yes, because Clean Mouth omitted important information from its claim.
Baker George took orders for his famous Christmas Fruitcake. His ad demanded that orders must be
placed two months prior to delivery. However, this year, George received three times his usual number
of orders. In mid-October, George knew that he could not make on-time deliveries. Which of the
following is true?
- correct answer George has to notify customers and ask if they still want their fruitcake
In 2012, Donny wanted to get a loan to buy a house but was told that his credit scores were bad. Which
of the following, if distributed via his credit report, is NOT in violation of the FCRA?
- correct answer A note claiming that five businesses sought Donny's credit score in 2010
Gerald wants to buy a new digital camera, and he sees an ad for a PicturePerfect Model A digital camera
at a 25 percent discount at Bull's Eye—a large department store. Gerald goes to Bull's Eye the following
day, but the store clerk tells him that they are out of that particular camera. The clerk suggests that
Gerald purchase the PicturePerfect Model B camera instead. Even though the Model B is not on sale, the
clerk insists it is worth it because the camera takes much better pictures and "will not break in a year,
like the flimsy Model A cameras." Has Bull's Eye committed an FTC violation?
- correct answer Yes, this is a bait-and-switch scheme.
Molly ordered a custom-made plaque online from Master Woodwork, Inc., for her niece's college
graduation. Master Woodwork promised that the plaque would ship on or before April 15, which meant
it would arrive in plenty of time for the graduation on May 1. On April 1, Master Woodwork notified
Molly that the shipment would be delayed until April 22. Molly did not respond because she was sure
the plaque would still in arrive in time for the graduation. Master Woodwork sent Molly an e-mail on
April 20 stating that the plaque would be shipped on April 30. Frustrated, Molly deleted Master
