5
Economics in Action
features discuss economic
principles in evidence
today.
Case Studies bring
fi nancial concepts to
life through realistic
scenarios and follow-up
questions.
Chapter Summary covers the
main ideas of the chapter.
Review questions reinforce
important concepts and help
you recall, organize, and use
the information presented in
the text.
Critical Thinking activities
expand chapter concepts and
challenge you to use problem-
solving skills. Thought-provok-
ing questions motivate you to
seek further information or
exchange thoughts and opinions
with classmates.
Academic Connections activi-
ties increase personal fi nance
knowledge while developing
academic skills. Academic
areas include history, math,
reading, research, science,
social studies, speech, and
writing. Activities may involve
individual or team work.
Math Challenge helps you
develop critical math skills
related to personal fi nance.
Tech Smart encourages
the exploration of fi nancial
concepts through high-tech
means.
Chapter 5
M aking Smart Decisions
111
afford. In other words, the key to fi
nancial well-being is spending less than you earn. An expression for this behavior is
within your means.
It is
the only way to have fi
nancial peace of
mind.living
Financially mature individuals realize they cannot afford everything
they want. Consequently, they establish priorities and plan carefully. They
make sure their needs are covered before wants are satisfi
ed. If there are
family responsibilities, the needs of the family generally come before the
wants of individual family members.
Financially responsible people know they
are accountable for their fi
nancial future. They develop a clear understanding of their fi
nancial
situation before making decisions that involve
current or future money matters.
Systematic
Decision
Making
When deciding important matters, a sys-
tematic or rational
decision-making process
can
help you arrive at the best course of action. This
decision-making process
is a method of choos-
ing a course of action after evaluating information and weighing the costs
and benefi
ts of alternative actions and their consequences. It involves fi
ve
steps, 5-4.
ECONOMICS in
ACTION
Marginal Analysis
Marginal analysis can help business owners
use their resources in the best way possible. For
example, suppose fi ve workers in a toy factory
produce 100 large, stuffed teddy bears per day. Each
worker makes 20 teddy bears apiece. They sew the
toy’s arms, legs, torso, and head separately. Then
they stuff the parts and sew them together. The
sewing room has fi ve heavy-duty machines.
The plant manager hires two more workers,
but does not buy new machinery. She reasons
that time used to stuff the pieces can be done
away from the sewing machines. This should
leave some machines free for the new workers to
sew more teddy bears. The seven workers handle
the new work arrangement well and produce 20
teddy bears apiece or 140 daily.
This success inspires the manager to add one
more worker, but she doesn’t get the results she
expects. The number of teddy bears produced
daily is only 152, not the 160 she expected.
Workers average only 19 teddy bears apiece.
They must stand in line to use equipment, which
slows them down. The manager realizes that
increasing total production by only 12 teddy bears
daily does not cover the cost of the eighth worker.
By using marginal analysis, businesses can
determine the right number of workers needed to
maximize their profi ts.
5-4
The five steps of the decision-
making process can help you
solve problems effectively.
Steps in the Decision-Making Process
Step Keyword Approach
1 Problem Defi ne the problem or
challenge.
2 Alternative Explore alternatives.
3 Choose Choose the best
alternatives.
4 Act Act on the decision.
5 Evaluate Evaluate the decision.
Chapter 10 Insurance
249
Case Study: Life Plans
Life Insurance for Coni
Coni is 23 and just started her fi rst job after college. She is single with
no dependents. Both Coni’s parents are living. A $150 credit card balance
and a $1,500 car loan are her only major fi nancial obligations other than her
apartment lease.
When Coni is 25, her father dies. His retirement funds leave just enough
money for her mother to make ends meet. Coni’s mother could become
fi nancially dependent on her if she outlives her source of income.
At 28, Coni marries Arend. Arend has no dependents. That year, Coni is
promoted at work. At 30, Coni has their fi rst child. Two years later, she has
a second child. She works part-time until the children reach school age. This
reduces her income temporarily. Coni and Arend start setting aside money
for the children’s college costs.
When Coni and Arend reach their mid-forties, the children are in high school.
They will start college in three and fi ve years. Coni’s mother is in a nursing
home, and Coni is paying most of the bills. Both Coni and Arend are working
and are at the peak of their careers. They expect their salaries to remain fairly
stable during the remaining 20 years of work.
Now Coni and Arend are in their mid-fi fties. Both children graduated from
college. Coni’s mother passed away. Coni and Arend begin to consider travel
and retirement.
Case Review
1. When Coni was single and both her parents were alive, do you think she
needed life insurance? Explain.
2. When Coni’s father died, what changes should she have made in her
insurance program? Why?
3. What type of insurance program
would you recommend for Coni and
Arend when they married? Why?
4. What insurance and other fi nancial planning would be suitable for a couple
with young children?
5. How would Coni and Arend’s fi nancial planning change when they reached
their forties?
6. What changes do you think they sh
ould make in their insurance program now? Why?
174 Unit 2 Managing Your Finances
Chapter Summary
People earn income from work or other sources, such as interest on
savings. Government taxes both individual and corporate income. Taxes pay
for government operations, services, and programs, including Social Security,
Medicare, and Medicaid. The government must borrow money when spending
exceeds tax revenues.
Taxpayers are required to fi le an annual income tax return. This involves
keeping necessary records and receipts and preparing income tax forms. The
federal tax code changes frequently as Congress struggles to meet the need
for revenues with a level of taxation voters will accept.
Social Security provides income when earnings stop for certain reasons.
Generally, employers and employees each pay half of the Social Security tax
on total income. As the number of people collecting Social Security increases
and the number of workers paying into the system decreases, reforms must
be made to keep the program funded.
Review
1. What is an employee benefit?
2. What is the difference between gross
income and net income?
3. How does government spending relate to
taxation?
4. Give three examples of public goods and
services that your taxes buy.
5. What is the greatest mandatory federal
government expenditure?
6. Name the four major types of taxes that
provide most state and local government
revenues.
7. Explain the difference between a
progressive tax and a regressive tax.
8. When you become employed, your
employer will ask you to fi ll out a _____
for tax withholding purposes.
9. What effect does raising the number of
allowances on a Form W-4 have on net
income?
10. What are the three common forms for
fi ling taxes?
11. Explain how to fi gure taxes owed.
udits a ypically t RS I he T alse. f r o rue T 12.
about 25 percent of all personal income
tax returns.
13. What are the two major purposes of
Social Security numbers?
nd a rogressive p ontrast c nd a ompare C 14.
regressive taxes.
e b ou y ould w ervices s overnment g hat W 15.
willing to pay higher taxes to support? Why?
Critical Thinking
Chapter 7 Income and Taxes 175
ederal f educing r f o ask t he t ad h ou y f I 6. 1
government spending, what programs or
services would you cut or eliminate and why?
17. What do you see as the consequences of
continued defi cit spending
•
for yourself and your family?
•
for continuing government services and
programs?
•
for business and industry?
•
for the United States and its position in
the world politically and economically?
ecessary? n eform r ecurity S ocial S s i hy W 8. 1
or f ecommend r ou y ould w ctions a hat W 9. 1
strengthening the Social Security program?
Why?
Academic Connections
0. 2 Research. Find out the current amount of
the national debt. Prepare a brief report
discussing how the national debt affects the
economy and you as a citizen.
1. 2 Research, writing. Visit the IRS Web site
and research the following items. Write a
two-page summary of your fi ndings.
•
Services the IRS provides for
taxpayers.
•
Questions and problems taxpayers
most frequently bring to the IRS.
•
Available advice and publications on
fi ling federal tax returns.
•
Recent and pending legislation that
affects individual and corporate income
taxes.
•
Tax audits—reasons returns are
audited and the procedure.
2. 2 Financial literacy, reading. Obtain
copies of tax Forms 1040EZ, 1040A, and
1040. Compare the three forms. Learn the
meaning of any terms appearing on the
forms you do not understand.
3. 2 Research, speech. Visit Web sites of the
IRS and the SSA. Report to the class on
the information and publications available
from each agency.
24. You live in an area that has a general sales
tax rate of 8.5 percent on most purchases.
How much sales tax would you pay for the
following goods and services from area
stores?
A. $150 jacket
B. $30 hair cut
C. $2 magazine
The tax rate in a neighboring county is
7 percent. How much can you save on each
item by crossing the county line to do your
shopping?
Tech $mart
ables t ax t ncome i ederal f atest l he t sing U 5. 2
on the IRS Web site, look up the income
tax fi gure for each of the following:
•
a single person whose taxable income
is $38,000
•
a married couple fi ling a joint return
with a taxable income of $100,000
uthorized a n a ith w ile F ree F RS I ompare C 6. 2
e-fi le software program. Use a spreadsheet
to record each program’s income
restrictions, fees, and customer support.
Math Challenge