Online Learning Center

	Economics 14/e McConnell
Online Learning Center

5-2 Assume 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 5-2. Compare the incomes of the lowest and highest fifth of the income receivers.

5-4 What are the major legal forms of business organization? Briefly state the advantages and disadvantages of each. How do you account for the dominant role of corporations in the U.S. economy?

5-9 What are the basic characteristics of public goods? Explain the significance of the exclusion principle. By what means does government provide public goods?

5-10 Draw a production possibilities curve with public goods on the vertical axis and private goods on the horizontal axis. Assuming the economy is initially operating on the curve indicate how the production of public goods might be increased. How might the output of public goods be increased if the economy is initially operating at a point inside the curve?

5-15 Suppose in Fiscalville there is no tax on the first $10 000 of income but earnings between $10 000 and $20 000 are taxed at 20 percent and income between $20 000 and $30 000 at 30 percent. Any income above $30 000 is taxed at 40 percent. If your income is $50 000 how much will you pay in taxes? Determine your marginal and average tax rates. Is this a progressive tax? Explain.

5-2 The distribution of income is quite unequal. The highest 20 percent of the residents receive 10 times more income than the lowest 20 percent.
5-4 Sole proprietorship partnership and corporation. Proprietorship advantages: easy to start and provides maximum freedom for the proprietor to do what she or he thinks best. Proprietorship disadvantages: limited financial resources; the owner must be a Jack-or-Jill-of-all-trades; and unlimited liability. Partnership advantages: easy to organize; greater specialization of management; and greater financial resources. Disadvantages: financial resources are still limited; unlimited liability; possibility of disagreement among the partners; and precarious continuity. Corporation advantages: can raise large amounts of money by issuing stocks and bonds; limited liability; continuity. Corporation disadvantages: red tape and expense in incorporating; potential for abuse of stockholder and bondholder funds; double taxation of profits; separation of ownership and control. The dominant role of corporations stems from the advantages cited particularly unlimited liability and ability to raise money.
5-9 Public goods are indivisible (they are produced in such large units that they cannot be sold to individuals) and the exclusion principle does not apply to them (once the goods are produced nobody -- including free riders -- can be excluded from the goods' benefits). The free-rider problem explains the significance of the exclusion principle. The exclusion principle separates goods and services which private firms will supply (because those who do not pay for them can be excluded from their benefits) and goods and services which government must supply (because people can obtain the benefits without paying). Government must levy taxes to get revenues to pay for public goods.
5-10 On the curve the only way to obtain more public goods is to reduce the production of private goods (from C to B). An economy operating inside the curve can expand the production of public goods without sacrificing private goods (say from A to B) by making use of unemployed resources.
5-15 Total tax 5 $13 000; marginal tax rate 5 40%; average tax rate 5 26%. This is a progressive tax; the average tax rate rises as income goes up.

Chapter 5 - The Mixed Economy: Private And Public Sectors