ANSWERS TO CHAPTER QUESTIONS
Chapter 4 Household Finance
1) The household is the entity that expresses the goals and resources of the
2) It is the sharing of resources to achieve common goals that make the household
the financial structure for the individual.
3) Some advantages and disadvantages of the various organizational structures
include:
a. Marriage Advantages
i. Governmental benefits
b. Marriage Disadvantages
i. Responsibility for others
c. Single Advantages
d. Single Disadvantages
i. Higher risk of total loss of income due to temporary or permanent job
e. Unmarried Couple Advantages
i. More flexibility in changing household members
4) According to the theory of choice people select bundles of goods over their life
cycle with the intent of maximizing their utility.
5) Spending decisions are unrelated to current income generated. Instead they are
6) No savings left. This approach in its pure form implies that people know when
7) The opportunity cost of time is the alternative to time spent in household work or
leisure time pursuits. It indicates that the time spent on both activities can be
8) While the cost of time is a noncash charge it can be made a real cash figure by
actually working additional hours. It is the ability to do so that makes it a viable
consideration in financial decision-making.
9) The household is an enterprise because it is an organization with a unifying goal,
to achieve the highest standard of living possible. Of course there are constraints
10) Finance is more practical, places more emphasis on cash flow and on
11) Under household finance all assets and liabilities are incorporated in decision-
making. The household is looked at as one portfolio with individual assets and
liabilities risks and projected returns or costs incorporated. Importantly, it is the
12) There are two types of household expenditure, nondiscretionary and discretionary.
Nondiscretionary costs, sometimes called maintenance costs are outlays that
provide no enjoyment, they are necessities. In contrast, discretionary items
sometimes called leisure outlays are items that member-owners derive pleasure
13) Some similarities between a household and a business include:
a. Household Similarities
i. Household run like a business for efficiency purposes.
ii. Can utilize many business techniques.
b. Household Differences
i. Smaller, and thus have less ability for diversification than big
businesses.
14) The theory of financial planning presents an approach dedicated to the particular
needs of individuals and their household structure. It offers new insights into the
15) There is no one optimal bundle generally speaking. However, every individual
has a certain set of preferences and these individual preferences must be weighted
16) One major factor to take into consideration when deciding on whether to
outsource a job is your opportunity cost. If Sherry makes $200 an hour and it
17) No. Operating efficiently indicates the right blend of fixed costs and variable
outlays, capital expenditures and savings to provide the optimal amount of leisure
outlays over the life cycle of the household.
18) TPM stands for Total Portfolio Management. It takes all assets and liabilities into
one household portfolio including human assets, real assets, and nonfinancial
19) Using tools such as opportunity cost of time in the household can help contribute
ANSWERS TO CASE APPLICATION QUESTIONS
Chapter 4 Household Finance
1) Richard thinks principally of the present. Monica’s views were more
2) Life cycle theory is the basis for personal financial planning’s concern
about mapping out resources for future needs. Clearly it is more in
line with Monica’s approach.
3) Looking at the household as a business mandates a logical look at
inflows and outflows not only for today but also for the future. It
4) Personal financial planning could bring together all their needs in a
5) Richard is not very comfortable with long-term planning whereas
Monica would like to see them plan more in advance. One course of
