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Finance 1

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Lesson 1: Assignment Problems 1.1 | Households make four kinds of economic decisions (textbook, pp. 4–5). Suppose you have two households with the same income. Household A has one income earner and Household B has two income earners.
How would the four types of economic decisions differ between these two otherwise identical households? (8 marks) | 1.2 | The first economic decision that households need to determine is consumption and savings. Household A with only one income earner would have considerably less to save then the double income earners of Household B. Most of Household A’s current earnings would be spent on consumption with very little available to set aside. Household B with two income earners would have more to save after spending on necessities of the home. Investment decisions would also differ between the two households. Household A would have very little to invest and would be more likely to invest in short term products so that their funds are readily available. Household B has many more resources and wealth to invest and could consider long term options. The third economic decision that households face is financing decisions. Household A would have a greater need to apply for loans to satisfy their needs and wants. Household B, with double income, would be less likely to borrow funds to fulfil their consumption but expected to utilize the availability of funds to accomplish their investment plans. The last financial decision that involves households is risk-management decisions. Household A would want to reduce their risks at all cost due to challenges that they may face unexpectedly. Household A should consider insurance to protect themselves from uncertainties. Household B could engage in increasing their risk within their investments in order to make a greater profit. They are able to assume this risk because of the resources and cash

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