Question

Assignment 3 1. List and discuss the 3 types of firms. 2. What is market failure? 3. List the roles of government. 4. Why does international trade occur? What is the exchange rate?

Answer 1

Ans 1.) 3 types of firms are :-

i.) Sole Proprietorship - It is a business owned by only one person. It is easy to set-up and is the least costly among all forms of ownership. The owner faces unlimited liability i.e the creators of the business may go after the personal assets of the owner if the business cannot pay them. It is usually adopted by small business entities.

ii.) Partnership - It is a business owned by two or more persons who contribute resources into the entity. The partners divide the profits of the business among themselves. In general partnerships, all partners have unlimited liabilities. In limited partnerships, creditors cannot go after the personal assets of the limited partners.

iii.) Corporation - It is a business organization that has a separate legal personality from its owners. Ownership in a stock corporation is represented by shares of stock. The owners enjoy limited liability and have limited involvement in the company's operation. The board of directors, an elected group from the stockholders controls the activities of the corporation.

Ans 2.) Definition of Market failure :-

Market failure is an economic situation defined by an inefficient distribution of goods and services in the free market. In market failure, the individual incentives for rational behaviour do not lead to rational outcomes for the group. Some types of market failure are :-

i.) Monopoly power

ii.) Missing markets

iii.) Productive and allocative inefficiency

iv.) Incomplete markets

v.) De-merit goods

vi.) Negative externalities

Ans 3.) Roles of government are as follows :-

i.) Provides the legal and social framework within which the economy operates.

ii.) Maintains competition in the markerplace.

iii.) Provides public goods and services.

iv.) Redistributes income.

v.) Corrects for externalities.

vi.) Takes certain actions to stablize the economy.

Ans 4.) International trade is the exchange of goods and services between countries. The main reasons for which international trade occurs are differences in technology, differences in resources endowments, differences in demand, the presence of economies of scale and the presence of government policies.

Exchange rate - An exchange rate is the rate at which one currency will be exchanged for another. It is also regarded as the value of one country's currencyin relation to another currency. Most exchange rates are free-floating and will rise or fall based on supply and demand in the market.