1.1 Households make four kinds of economic decisions. Suppose you have two house
ID: 1167670 • Letter: 1
Question
1.1 Households make four kinds of economic decisions. Suppose you have two households with the same income. Household A has one income earner and Household B has two income earners.
How would the four types of economic decisions differ between these two otherwise identical households?
1.2 Three friends have just graduated, each with a B.Mgt. degree. One wants to start a restaurant and another wants to work as a subcontractor in a building trade. The third friend wants to put together a firm with a couple of other graduates to provide several kinds of complementary financial services including insurance, financial planning, and bookkeeping.
What form of business organization would you suggest each of the three friends should use, and why?
Explanation / Answer
(1)
The 4 types of household decisions are:
1. Supply factors of production (labor)
2. Demand & consume goods
3. Save and
4. Maximize utility
Even though both households have same income, household A has 1 earner and household B has 2 earners.
So, the earner in A earns much more than each of the earners in B.
(a) In A, each earner supplies much more labor than each earner in B.
(b) Consumption of both households are likely to be the same, since consumption depends on total household income.
(c) Saving of both households are likely to be the same, since saving depends on total household income.
(d) On utility maximization, nothing specific can be concluded, since utility function of individuals even with same income can vary.
(2)
The restaurant owner can opt for a proprietorship organization, since he faces very low risk, requiring little reason to separate his personal assets from the business.
The subcontractor should form a corporation, since his business risk is higher & even if his personal assets can be legally separated from his business, he can still be held liable for personal liabilities (for example, damaged caused by a recklessly & poorly constructed building).
The financial advisor should also form a corporation, since he is in a risky business & can be held liable for certain reckless acts (for example, giving poor financial planning advice to clients by recklessness/lack of awareness or knowledge, that causes financial damage to clients).
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