hw ch. 5 1-16 - ECON 203 TA Ergin Bayrak Chapter 5 Homework...

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ECON 203 TA: Ergin Bayrak September 20, 2005 Chapter 5 Homework Questions 1-16 1. Function Distribution of Income: how the nation’s earned income is apportioned among wages, rents, interest, and profits (among factors of production), according to the function performed by the income receiver; the proportion of income going to landowners, employees, and owners of capital. a. Example: “The combined share of wage income and proprietary income has remained remarkably stable at about 80% since WWII.” Personal Distribution of Income: how the nation’s money income is divided into among individual households. b. Example” “The relative income of the richest households is higher today than in 1970.” 2. a. There is a large gap between the lowest and highest income. This just shows that there is a serious inequality in income distribution, with the highest earning 10x that of the lowest. 3. Plant: a physical establishment (factory, farm, store) that performs one of more functions in fabricating and distributing goods and services. Firm: a business organization that owns and operates plants. Industry: a group of firms that produce the same or similar products.
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Vertically Integrated Firm: own plants that perform different functions in the various stages of the production process; example: Shell owns oil fields, refineries and gas stations. Horizontally Integrated Firm: Multiplant firms: owns plants performing much of the same function; example: Coca-Cola. I purchased two Cokes today. Conglomerate: own plants that produce products in several industries; example: Pfizer makes prescription medications (Lipitor), gum (Trident), razors (Schick), mints (Certs), and so forth. 4. The three major forms of business organization are sole proprietorship, partnership, and corporation. The form that is most prevalent in terms of numbers is sole proprietorship. This is so because they are easy to set up and organize; there is no complex paperwork or legal expense. The proprietor is its own boss and has substantial freedom. The form that is dominant in terms of sales is a corporation. The major advantages of a corporation include improved ability to raise financial capital (selling of stocks and bonds), limited liability, can easily expand the scope of their operations and realize the benefits of expansion, and are at least immortal. Their advantages typically override their disadvantages.
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