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Chapter 4 The US Economy

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The U.S. Economy: Private and Public Sectors

ANSWERS TO END-OF-CHAPTER QUESTIONS
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Distinguish between the functional and personal distribution of income. Which is being referred to in each of the following statements? “The combined share of wage income and proprietary income has remained remarkably stable at about 80 percent since the Second World War.” “The relative income of the richest households is higher today than in 1970.” The functional distribution of income shows the sources of income, i.e., as payments to the four factors of production: labor, entrepreneurs, physical capital, and land (natural resources). The breakdown is: wages and salaries, proprietors’ income, corporate profits, interest, and rents. There are five categories whereas there are only four factors of production, because proprietors’ income includes profits as well as wages, interest, and rents. The personal distribution of income shows how income, regardless of its source, is divided by quintiles among all the families in the country. Whereas the worst-off 20 percent of families, the lowest quintile, gets most of its income from wages and transfer payments, the best-off 20 percent gets considerable income from profits, interest, and rent.

The first statement refers to the functional distribution of income; the second refers to the personal distribution of income.
(Key Question) Assume that the five residents of Econoville receive incomes of $50, $75, $125, $250, and $500. Present the resulting personal distribution of income as a graph similar to Figure 4.2. Compare the incomes of the lowest and highest fifth of the income receivers. The distribution of income is quite unequal. The highest 20 percent of the residents receive 10 times more income than the lowest 20 percent.

Distinguish clearly between a plant, a firm, and an industry. Contrast a vertically integrated firm, a horizontally integrated firm, and a conglomerate. Cite an example of a horizontally integrated firm from which you have recently made a purchase.

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The U.S. Economy: Private and Public Sectors

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A plant is an operating unit where production takes place. This production can be manufacturing, farming, mining, retailing, wholesaling, warehousing—anything, in short, necessary for the production and distribution of goods and services.

A firm is the business organization that owns one or more plants. A firm can be very large, such as General Motors, which owns many plants in many countries, or very small, such as an independent corner grocery.

An industry is a somewhat arbitrary grouping of firms producing similar products—such as the steel industry. There may be a problem defining which firms belong to an industry; the firms in the automobile industry produce many non-automotive products. A vertically integrated firm contains plants that are involved in various stages of the production process. A horizontally integrated firm contains plants that are involved in the same function of business. A conglomerate firm has plants that are producing products in several industries. Examples might include grocery stores, retail outlets, gas stations, or similar establishments that may have bought out competitors to open new stores.

(Key Question) What are the three major legal forms of business organization? Which form is the most prevalent in terms of numbers? Why do you think that is so? Which form is dominant in terms of total profits? What major advantages of this form of business organization gave rise to its dominance?

The three legal forms of business organizations are: sole proprietorship, partnership, and corporation.
Proprietorships are the most prevalent. They are easy to start (relatively low cost), often don’t require a large customer base to be profitable, and provide maximum freedom for the proprietor to do what she/he thinks best.

Corporations are dominant in terms of total profits. They can access large amounts...