Holt 7525-9 S15_IT

3. A partner in a partnership has unlimited liability and is liable for all debts incurred by the
partnership, including debts arising from the actions of the other partners. A partner can face
financial ruin due to the incompetence, dishonesty, or bad luck of the other partners. A
person who enters into a partnership is trusting his or her life savings to the other partners.
4. Because a corporation is a separate legal person, the stockholders (owners) of a corporation
have limited liability. Limited liability means that the stockholders are not personally liable for
the debts of the corporation. Thus, a person who invests money in corporate stock is putting
at risk only the amount of money invested in the business.
5. The absence of residual claimants in nonprofit firms is likely to lead to:
(1) Employees engaging in more shirking in nonprofit firms than in profit-seeking firms.
(2) Top administrators spending any excess funds within the firm to benefit themselves.
6. According to Adam Smith, the division of labor increases labor productivity for three reasons:
(1) “The increase of dexterity in every particular workman.”
(2) “The saving of the time which is commonly lost in passing from one species of work to
another.”
(3) “The invention of a great number of machines which facilitate and abridge labour, and
enable one man to do the work of many.”
Answer to Think Like an Economist:
You will want to hire an attorney from the big city. Neither of the small town attorneys is likely to
specialize in probate work. Because of the small market, each small town attorney is likely to do a
wide variety of legal work. Division of labor is limited by the extent of the market. You are more
likely to find an attorney in the big city who specializes in (and is thus an expert in) probate work.
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The Firm 19 - 16