Question1:

Ch. 4. When would it be beneficial for the household enterprise to outsource some activities, for example, cooking?

Student 1:

It will be more beneficial for the household enterprise to outsource some activities, like cooking, if the alternative activity that is being substituted can create more pleasure and value within the same amount of time than the current activity (cooking). This refers to opportunity cost of time. The household enterprise attempts to run the household as efficiently as possible in order to provide as much time and money as possible for pleasurable activities (Altfest,2017, p. 87). The cost of time theory states that alternative activities are limited by a 24-hour day, an individual’s time has value, and the alternative should bring pleasure. The production activity is the time spent for each activity. “The value of each hour of work or leisure is measured by the amount of money 1 additional hour of work would provide. Looking at it in this manner can make it easier to select between working harder, or say, having more fun eating out” (Altfest, 2017, p. 98).  The household enterprise should try to “maximize the utility of its activities by selecting the optimal mix.”

I personally am too frugal to hire another individual to cook for my household enterprise. I like trying to save as much money and cut cost on anything I think I can do myself. However, I have a pool/spa at home, and it is time consuming. I do hire a pool service company to clean it up because my time could be well spent on other alternative activities.

Reference:

Altfest, L. J. (2017). Personal financial planning. McGraw-Hill Education.

Hayes, A. (2020, August 28). Understanding Opportunity Cost. Retrieved September 17, 2020, from https://www.investopedia.com/terms/o/opportunitycost.asp

Question 2:

From Ch. 5. What are some reasons that a person may have poor net cash flow yet be considered to be in good financial health?

Student 2:

The personal cash flow statement measures your inflow of cash (money brought in) and outflow of cash (expenditures). The inflow cash can include your salaries, interests, dividends and capital gains. The outflow cash can include food, groceries, rent, gas, entertainment. It also includes money to buy insurance, stocks, bonds for future investments. The net cash flow is the amount of outflow minus the amount of inflow. The net cash flow can be positive, meaning you make more money than you spend. It could be negative, meaning you spend more money than you make.

For an individual, he may have a negative or very poor net cash flow, but still in good financial condition. The reason depends on what kind of expenditure he has. If he spends a lot in investment, such as buying stocks and bonds, then the money spent will eventually bring him benefits and more income. In this case, even if his net cash flow is not good, his total financial condition is good. Another reason for the poor net cash flow is that he may use the money to pay certain debts. In this way, his total debt will be decreased, and his financial condition will be better.

References:

Evaluating Your Personal Financial Statement. Retrieved from

https://www.investopedia.com/articles/pf/08/evaluate-personal-financial-statement.asp