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UTK Notes


HW2: Homework - Ch. 2: Markets and Economies

Question 1

Match the economic system with the correct description.

1. North Korea is a country ruled by the dictator Kim Jong‑un. All resources in the economy are owned by the state and allocated based on his wishes.

2. Australia’s economy is marked by the private ownership of resources, along with prices directing their allocation.

3. The economy of a small village in the Amazon rainforest is based on past methods of production and tradition.

A. Traditional Economy
B. Command Economy
C. Market Economy

Hint Consider the components of different economic systems. What does it mean if private individuals and firms own the factors of production? What does it means if these same resources are controlled by a central authority?
Answer 1. B. Command Economy, 2. C. Market Economy, and 3. A. Traditional Economy. What will be produced? For whom will it be produced? How will it be produced? The answers to these three questions determine the type of economic system.

North Korea is a Command Economy. Command economies are marked by government ownership of resources. Answers to the three questions are determined by the centralized planning of the government.

Australia is a market, or market‑oriented, economy. Market economies are characterized by private ownership of resources. Prices act as the mechanism for the allocation of scarce resources. The what, for whom, and how are determined by the movements of market forces. Prices act as a signal of where resources should be allocated.

The Amazonian village is a traditional economy that is dictated by the traditions that have been in place over the years. One result is little economic growth, as there are no improvements in production techniques or innovation because tradition is followed.

Question 2

Alexus and Teiki are preparing to open a burger joint called “Alexus and Teiki’s Burgers and More Burgers.” They are still unclear about the various types of business organizations. Answer the questions to clarify the differences between business organizations.

Which business organization can raise capital by issuing stock?

A. Sole Proprietorship
B. Corporation
C. Partnership

Which business organization typically has a single owner that has unlimited liability?

A. Corporation
B. Partnership
C. Sole Proprietorship

Hint There are many different types of businesses, including corporations, sole proprietorships, partnerships, business co‑ops, and franchises, to name a few. If unlimited liability means that you can lose everything, including your business, your house, and your car, do you think that a business with 1 owner or 100 owners is more likely to have unlimited liability?

Please note that in this question, a partnership is considered a general partnership. There are other types of partnerships, such as limited partnerships and limited liability partnerships, but only consider the general partnership for this question.
Answer B. Corporation and C. Sole Proprietorship. Although there are many types of business organizations, three of the more common organizations include a sole proprietorship, a (general) partnership, and a corporation.

A sole proprietorship has a single owner with unlimited liability. Unlimited liability means that your personal assets are not protected should something happen to the business such as a lawsuit or a bankruptcy.

A partnership has unlimited liability and more than one owner.

A corporation has limited liability and the ability to issue stock to raise capital.

Question 3

Classify each description as describing a sole proprietorship, a partnership, or a corporation.

Hint Recall the main distinguishing characteristics of sole proprietorships, partnerships, and corporations. Think about the terms "sole proprietorship" and "partnership." The names should give you some help in placing the descriptions.

A. Profits of this type of business are subject to double taxation.

A. Sole Proprietorship
B. Partnership
C. Corporation

Answer C. Corporation

B. This type of business has many of the legal rights of an individual and can issue stock to raise financial capital.

A. Sole Proprietorship
B. Partnership
C. Corporation

Answer C. Corporation

C. Paula employs four people at a bakery. After paying necessary expenses, the bakery earns $5,000 profit each month. Paula pays this profit to herself.

A. Sole Proprietorship
B. Partnership
C. Corporation

Answer A. Sole Proprietorship

D. This type of business accounts for a majority of revenue on all goods and services in the U.S.

A. Sole Proprietorship
B. Partnership
C. Corporation

Answer C. Corporation

E. Mac, Dennis, Charlie, and Frank have a pool cleaning business. They share the work and the profits equally. Dennis answers the phone, and Charlie will not clean filters.

A. Sole Proprietorship
B. Partnership
C. Corporation

Answer B. Partnership

F. In this type of business, management responsibility usually falls on one individual.

A. Sole Proprietorship
B. Partnership
C. Corporation

Answer A. Sole Proprietorship
Explanation In a sole proprietorship, management responsibilities are usually borne by one person: the owner of the business. This single owner also receives all the profits of the company after the necessary expenses are paid.

In a partnership, multiple individuals own the business and share in the responsibilities and profits of the firm.

Corporations, although not the most plentiful form of business, sell most of the goods and services that are sold in the United States. A corporation can issue stock, whereas sole proprietorships and partnerships cannot, and have many of the legal rights that people have. Profits that a corporation earns are taxed twice. Profits are taxed according to corporate income tax rates and are then taxed according to individual income tax rates when distributed to shareholders in the form of dividends.

Question 4

What are the owners of a limited liability corporation (LLC) called?

A. Owners
B. Bondsmen
C. Members
D. Shareholders

Hint A limited liability corporation does not sell shares of ownership to the public.
Answer C. Members. The owners of an LLC are called members.

Question 5

Which statement or statements are true of all firms?

A. They produce goods, services, or both.
B. They make a net profit or go out of business after two quarters of consecutive loss.
C. They issue shares of publically traded stock.
D. They sell goods, services, or both.

Which statement or statements are true of all households?

A. They have income solely from employment.
B. They consume goods, services, or both.
C. They provide labor to firms.
D. They are composed of children and adults.

Hint Think about the interactions between firms and households. Would firms exist if no one was purchasing their products, services, or both?
Answer For a firm, there are two correct responses:
  • A. They produce goods, services, or both.
  • D. They sell goods, services, or both.
There is no requirement that a firm be profitable or that it go out of business after a designated period of sustained loss. The firm's owners are permitted to act in their own self‑interest and decide whether to continue operations or shut down.

And while some firms do sell shares of publicly-traded stock, this is not a necessary attribute of a firm.

For a household, there is only one correct response:
  • B. They consume goods, services, or both.
People in a household can provide labor to a firm, but they do not have to.

A household can consist of a wide variety of people; it does not have to be only children and adults. Households can be composed of children and adults, but they can also be composed of just adults, just one adult, or several adults and one child.

Many households receive a majority of their income from employment, but households can also obtain income in other ways. They can obtain income from social security, welfare, or investments, to name a few. Some households may not even have any income.

Question 6

Please complete each of the following statements on the money flows within the circular flow diagram.

Hint The circular flow model is really composed of two flows: goods and services in one direction and money and profit in the other. This question is focusing on the money and profit rather than the goods and services. Adding governments to the model introduces taxes and transfers.

A. Governments supply ________ to both households and firms.

A. Transfers
B. Rent, Wages, Interest, and profit
C. Taxes
D. Expenditures on goods and services

Answer A. Transfers

B. Firms receive ________ from the goods market.

A. Expenditures on goods and services
B. Taxes
C. Rent, Wages, Interest, and profit
D. Transfers

Answer A. Expenditures on goods and services

C. There is a flow of ________ from both households and firms to governments.

A. Expenditures on goods and services
B. Rent, Wages, Interest, and profit
C. Taxes
D. Transfers

Answer C. Taxes

D. Factor markets provide ________ to households.

A. Taxes
B. Expenditures on goods and services
C. Transfers
D. Rent, Wages, Interest, and profit

Answer D. Rent, Wages, Interest, and profit
Explanation When the government becomes involved in the circular flow model, the outer circle remains the same, and government is placed in the middle of the circle. Taxes flow from both households and firms, and in response the government provides transfers to these two agents. Firms still receive expenditures on goods and services from the goods markets, and in turn provide factor markets with rent, wages, interest, and profit which are then transferred through factor markets to households.

Question 7

Please label the circular flow diagram.

Question07.jpg - Super Dollar Mart buys a lot on which to build their next store. Michelle buys a toaster to make toast each morning. Jack makes a decent living pruning beanstalks. JC Nickel has a record quarter selling black trenchcoats.

Businesses ________ and ________, where as households ________ and ________.

A. Buy Products
B. Sell Products
C. Sell Resources
D. Buy Resources

Hint How does money flow in the economy?
Answer Answer07.jpg - Super Dollar Mart buys a lot on which to build their next store. Michelle buys a toaster to make toast each morning. Jack makes a decent living pruning beanstalks. JC Nickel has a record quarter selling black trenchcoats. B. Sell Products, D. Buy Resources, A. Buy Products, and then C. Sell Resources. The circular flow diagram illustrates the flow of resources and money in the market. Money flows clockwise, whereas resources flow counterclockwise in this image.

Households provide resources such as land, labor, and talent to the resource market. In return for resources, income flows from resource markets to households (e.g., wages for Jack). Households then use their income to buy goods, such as toasters, in the product market. Businesses create products and sell them in exchange for revenue (e.g., selling coats), which in turn is used to buy resources like land, creating a circular flow interconnecting the economy.

In summary:
  1. Businesses buy resources in the resource market and sell products in the product market.
  2. Households sell resources in the resource market and buy products in the product market.
Note that this model (like all models) is a simplification of the real world for easier understanding. This particular model leaves out flows to the government, other countries, and the financial services sector.

Question 8

Determine where each example goes in the circular flow diagram. More than one example may go into a bin.

Question08.jpg - the long hours that Mot, a hairstylist, works at a futuristic hair salon money paid for lunch at a school cafeteria the $100 a mobile provider receives from one of its customers each month rent paid by Sapling for its office building income that Bill obtains from his consulting job a bike bought from a local Walmart a laptop sold by Amazon in a lightning deal labor that Larry provides Intel as an engineer

Hint In what ways do firms and households interact via markets? What do these groups exchange with one another?
Answer Answer08.jpg - - the long hours that Mot, a hairstylist, works at a futuristic hair salon money paid for lunch at a school cafeteria the $100 a mobile provider receives from one of its customers each month rent paid by Sapling for its office building income that Bill obtains from his consulting job a bike bought from a local Walmart a laptop sold by Amazon in a lightning deal labor that Larry provides Intel as an engineer The circular flow model shows how firms and households interact with each other in two markets: markets for goods and services and markets for factors of production.

In markets for goods and services, firms are sellers and households are buyers. Goods and services flow from firms to consumers. Of course, firms do not give away their products, so expenditure on goods and services flows from households to firms. Here, the bike from Walmart and the laptop from Amazon are examples of products that go from firms to households via goods-and-services markets, whereas the $100 a mobile service provider collects and the money for lunch are examples of money flowing from households to firms.

The buyer and seller roles are reversed in markets for factors of production, where firms purchase inputs from households. Flowing from households to firms are all of the things that businesses need for production, such as the examples of Larry and Mot's labor. In exchange for these resources, households get paid. Bill's consulting income and the rent that Sapling pays are examples of payments for factors of production.

Question 9

Classify each resource used in production as land, labor, capital, or entrepeneurs.

Hint What are the resources used in production? What can each resource earn?

A. Ore

A. Entreprenurs
B. Labor
C. Land
D. Captial

Answer C. Land

B. Adrianne, a server at Sonic Drive-In

A. Entreprenurs
B. Labor
C. Land
D. Captial

Answer B. Labor

C. Farmer Marshall’s tractor

A. Entreprenurs
B. Labor
C. Land
D. Captial

Answer D. Captial

D. Aunt Sandy’s Jammin’ Jellies (the business)

A. Entreprenurs
B. Labor
C. Land
D. Captial

Answer A. Entreprenurs

E. The Rio Grande

A. Entreprenurs
B. Labor
C. Land
D. Captial

Answer C. Land

F. Your coworkers

A. Entreprenurs
B. Labor
C. Land
D. Captial

Answer B. Labor-

G. Kyle’s Taco Truck (the idea)

A. Entreprenurs
B. Labor
C. Land
D. Captial

Answer A. Entreprenurs-

H. Kyle’s Taco Truck (the truck itself)

A. Entreprenurs
B. Labor
C. Land
D. Captial

Answer D. Captial-
Explanation Land is the term used for all natural resources. This includes land, minerals, natural gas, and even bodies of water. When you own a natural resource, the income you receive is referred to as rent.

Labor involves people working for a wage. Most of the resources households bring to the production process are in the form of labor (Adrianne, your coworkers, and your favorite bartender).

Capital includes goods that are used to produce other goods. When you own capital, the income you receive is called interest.

Entrepreneurs are the people who come up with ideas and take risks. Entrepreneurs use their ideas along with the other factors of production to produce goods and services and are important to the production process because they coordinate land, labor, and capital. The income earned from entrepreneurial ability is called profit (Aunt Sandy and Kyle).

Question 10

First complete the statement about how people acquiring what they want, then describe the functions of markets.

Hint In a market economy, workers use the pay that they receive for doing their jobs to purchase what they need.

A. Through the ________ people can acquire what they want without needing the ________ necessary to produce all the products they wish to consume.

A. Financial Market
B. Real Estate Market
C. Goods and Services Market
D. Labor Market
E. Stock Market

Answer C. Goods and Services Market

A. Liquidity
B. Knowledge and Skills
C. Rental Income
D. Shares
E. Wages

Answer B. Knowledge and Skills
Full Answer Through the goods and services market, people can acquire what they want without needing the knowledge and skills necessary to produce all the products they wish to consume.

B. Select the functions of markets from the accompanying list.

Markets

A. Decide the types of goods produced.
B. Develop government budgets.
C. Determine the distribution of goods.
D. Allocate resources for production.

Answer A. Decide the types of goods produced, C. Determine the distribution of goods, and D. Allocate resources for production.
Explanation The market for goods and services allows people to consume what they need and want without needing the skills to produce all these products. For example, you do not need to know how to rear your own cattle if you want to consume beef. You can exchange money to buy beef, a transaction facilitated by the market system.

A market economy is a social mechanism that helps coordinate resource allocation for production. Consumers indicate to producers which goods they want to buy in output markets, and profit-maximizing producers respond by producing goods favored by consumers. Market mechanisms also decide to whom goods will be distributed through the distribution of income. Input markets move factors of production to where they will do the most good.

Government budgets, on the other hand, are political documents and are developed in the political sphere. The economy may influence policy–makers' decisions, but markets do not make the final decisions.