DeVry University, Chicago

ECON ECON312

chapter 5

1)Name the categories used in describing the functional distribution of income. Tell which type receives the largest share and approximately how much this is in fraction or percentage terms.

2. How do households dispose of their income? Identify the three major ways income is disposed of and the relative share for each category.

3. Describe the business population. What is the difference between a plant, a business firm, and an industry?

4. What are the three principal legal forms of business firms? What are the advantages and disadvantages of each?

5. Define what is meant by a corporation and give two reasons why corporations dominate the American business sector.

6. Explain what “separation of ownership and control” of the modern corporation means. How is this situation a principal-agent problem?

7. Classify each of the following specific policy actions in terms of the five basic functions of government. Justify your classification in each case.
   1. Government expenditures for military and space research
   2. Amending the existing social security system to provide “catastrophic health insurance” for long illnesses
   3. The establishment of the Federal Trade Commission to police false and misleading advertising

1. 4. State subsidies to local school districts
   5. A Federal excise tax on gambling
   6. A program to distribute surplus agricultural products to poor families

8. “A society has every right to reject the distribution of income which is automatically formed by the market system.” Do you agree? Justify your position.

9. Explain what is meant by the term “market failure” by giving two major types of such failures. Then explain the reasons behind each type of failure.

10. Define spillover cost and give an example.

11. Explain the exclusion principle and the free-rider problem and how they are related.

12. Differentiate between government purchases of goods and services and government transfer payments.

13. How is total government spending defined? What is its size in the economy?