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Example 16: Since 1950,

Example 16: Since 1950, the U.S. population has slightly more than doubled. But the number of Americans 65 and older has more than tripled. 2. Aging of the baby boom generation. The baby boom generation consists of Americans born from 1946 to 1964, when the birth rate in the U.S. was unusually high. As this large cohort moves into the retirement years, the number of Americans eligible for social security and Medicare will increase. Example 17: Between 2011 and 2029, the baby boom generation will be entering into the post- 65 years. The number of Americans 65 and older is expected to increase from about 44 million in 2013 to over 70 million in 2030. 3. For spending on Medicare, the increase in the amount of health care available. Health care spending in the U.S. has generally been increasing. Health care spending as a percentage of GDP has increased from 5.7% in 1965 to about 17% in 2013. For a list of the factors that have contributed to the increased health care spending, see the material in Chapter 30. According to the Congressional Budget Office, about half of increased health care spending has been caused by “expanded capabilities of medicine brought about by technological advances”. In other words, we spend more on health care because there is more health care available. Example 18A: In 1954, Grandpa visits his doctor complaining of shortness of breath, a persistent cough, swollen feet, and a general fatigue. After a number of tests, Grandpa is diagnosed with an advanced case of heart disease. The doctor’s advice to Grandpa is, “Make a will.” Example 18B: In 2014, Grandpa visits his doctor complaining of shortness of breath, a persistent cough, swollen feet, and a general fatigue. After a number of tests, Grandpa is diagnosed with an advanced case of heart disease. The doctor goes over Grandpa’s treatment options. These include a variety of medications to prevent blood clots, lower bad cholesterol, control heartbeat force and rhythm, relax and dilate blood vessels, control blood pressure, and thin the blood. There are also a number of surgical options, such as angioplasty, coronary stent placement, coronary bypass surgery, and possibly even heart transplant. It is likely that the amount of health care available will continue to increase in the future. New prescription medicines will be discovered and new surgical techniques will be developed. And health care spending as a percentage of GDP will continue to increase. Appendix: History of the Federal Personal Income Tax In 1913, the Sixteenth Amendment to the Constitution gave the federal government the authority to impose a personal income tax. The initial personal income tax was a minor burden. Most individuals did not earn enough annual income to have a personal income tax liability. Individuals with annual income of less than $3,000 (about $70,000 in 2013 dollars) paid no income tax. The tax rate was 1% on incomes from $3,000 up to $20,000 (about $470,000 in 2013 dollars.) Thus, most individuals who did have a tax liability were taxed at a rate of 1%. The top marginal tax rate was 7% and was imposed on annual incomes over $500,000 (about $11,800,000 in 2013 dollars). The tax rates imposed by the federal personal income tax were soon increased. By 1918, the top tax rate had risen to 77% (on incomes of over $1,000,000) and the minimum tax rate had risen to 6% (on incomes of up to $4,000). After the First World War, tax rates were gradually lowered, so that the top tax rate was 25% from 1925 to 1931. Tax rates were increased in 1932, 1936, and 1941, so that the U.S. entered the Second World War with a top tax rate of 81% (on incomes of over $5,000,000). The top rate hit a peak of 94% (on incomes of over $200,000) in 1944. The top tax rate was 91% from 1946 through 1963. The top rate was lowered to 70% by the Kennedy tax FOR REVIEW ONLY - NOT FOR DISTRIBUTION Taxes, Deficits, and the National Debt 13 - 10

cut of 1964. The top rate was lowered to 50% in 1982 and to 28% in 1988. The top rate was increased to 31% in 1991, and to 39.6% in 1993. The top rate was lowered to 35% in 2003. The top rate was increased to 39.6% in 2013. This table indicates the tax rates for single taxpayers for the year 2015. Taxable Income Tax Rate $0 – $9,225 10% 9,226– 37,450 15% 37,451– 90,750 25% 90,751 – 189,300 28% 189,301– 411,500 33% 411,501– 413,200 35% over 413,201 39.6% Study Guide for Chapter 13 Chapter Summary for Chapter 13 Taxes can be classified as proportional, progressive, or regressive. A proportional tax imposes the same tax rate on all levels of income, and thus does not change the distribution of income. A progressive tax imposes higher tax rates on higher levels of income, and thus changes the distribution of income by making it more equal. A regressive tax imposes higher tax rates on lower levels of income, and thus changes the distribution of income by making it more unequal. Most taxes imposed in the U.S. are regressive. Since lower income households consume a higher percentage of their incomes compared to higher income households, any tax that increases the prices of non-luxury goods will be regressive. Thus, sales and property taxes tend to be regressive. The four largest federal taxes are the personal income tax, the social security tax, the corporate income tax, and federal excise taxes. Of the four major federal taxes, the social security tax and federal excise taxes are regressive. The social security tax is partially hidden from the taxpayers. The social security system encourages retirement and rewards long life. The essential purpose of taxation is to fund government operations. A good tax is one which imposes as little excess burden as possible. The sources of excess burden are; (1) the cost for the government to collect the tax, (2) the cost for the taxpayers to comply with the tax, and (3) the deadweight loss of the tax. To minimize deadweight loss, a tax should be broad-based, should have low rates, and should be imposed on inelastic goods. The federal personal income tax imposes a large excess burden. Because the tax is extremely complicated, the collection and compliance costs are high. The presence of many loopholes increases the excess burden by; (1) narrowing the tax base, (2) necessitating higher tax rates, and (3) making the tax more complicated. The federal personal income tax would impose a smaller excess burden if it were simpler and had fewer loopholes. Since the federal personal income tax is a progressive tax, the burden of the tax falls more heavily on higher income taxpayers. The bulk of federal personal income taxes are paid by the top 10 percent of income earners. Years of budget deficits have led to a huge national debt. The current generation bears the burden of deficit spending to the extent that private consumption is crowded out by increased government use of resources. Future generations bear the burden of deficit spending to the extent that; (1) deficit spending favors current consumption rather than investment and (2) the deficit spending is financed by foreign creditors. FOR REVIEW ONLY - NOT FOR DISTRIBUTION 13 - 11 Taxes, Deficits, and the National Debt

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    PRINCIPLES OF ECONOMICS JEFF HOLT S

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    Principles of Economics, 6th Editio

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    16. Study Guide for Chapter 7 17. C

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    11. Appendix: Book Review - “The

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    20. Appendix: The NCAA Cartel 21. S

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    Introduction: A Brief History of U.

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    In the twentieth century, per capit

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    Appendix: The 35 Largest National E

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    Multiple Choice: ___ 1. The Jamesto

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    2. Describe the economic cost of th

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    Chapter 1 Scarcity and Choices The

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    Example 5B: At the end of 1982, the

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    Example 11: When Cindy quits her jo

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    consequences may result in failure

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    An upward sloping curve (as in Exam

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    In making decisions, humans tend to

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    5. ______________________ _________

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    ___ 13. If the value of one variabl

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    Y Point X Y A 0 1 B 3 3 C 6 5 D 9 7

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    Chapter 2 Trade and Economic System

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    Example 4B: The following quantitie

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    1. An increase in the quantity of r

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    3. For whom to produce? This is det

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    The graph below illustrates the shi

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    The two primary economic systems ar

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    ___ 12. The capitalist vision sees

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    ___ 25. According to the book “Ca

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    Chapter 3 Demand, Supply, and Equil

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    . For inferior goods, income and de

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    The same information can be placed

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    Not only does a free market elimina

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    $7 - 6 - 5 - S 3 S1 S 2 Price 4 - 3

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    Example 17: The graph below illustr

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    Questions for Chapter 3 Fill-in-the

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    ___ 12. Assuming a market originall

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    $8 - 7 - 6 - 5 - Price 4 - 3 - 2 -

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    Chapter 4 Inflation and Unemploymen

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    Computing the Rate of Inflation The

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    Full Employment Though unemployment

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    3. Cyclical unemployment - due to d

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    During the Great Depression, the ec

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    Appendix: Think Like an Economist -

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    Answer questions 8. and 9. based on

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    ___ 25. The extension of unemployme

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    Chapter 5 Measuring Total Output: G

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    5. Leisure. Leisure time is by defi

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    The U.S. is a high per capita GDP c

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    Example 17: In “An International

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    The simple circular flow diagram be

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    ___ 3. Which of the following would

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    2. Explain what nonproduction trans

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    Chapter 6 The Aggregate Market The

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    Example 2C: Assume the same facts a

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    Example 5B: The price of crude oil

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    Price Level Real GDP SRAS AD 2 AD 1

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    Appendix: Why the Aggregate Demand

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    ___ 3. DEF Company can invest in ne

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    2. List and explain the two factors

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    Chapter 7 Classical Economic Theory

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    Notice that the investment demand c

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    Long-Run Equilibrium If Real GDP is

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    Example 6B: When the economy is in

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    Laissez-faire If the economy is sel

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    ___ 5. According to Say’s Law: a.

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    3. On the graph below, draw an aggr

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    Chapter 8 Keynesian Economic Theory

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    Example 2B: The graph below illustr

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    Example 5: Assume that the table be

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    Notice on the graph on the previous

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    According to Keynesian theory, a ch

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    “The General Theory” also inclu

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    ___ 8. If the consumption function

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    3. If the MPC is .667, and investme

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    Chapter 9 Fiscal Policy The basic e

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    Keynesian Fiscal Policy Theory and

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    Example 5A: The federal government

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    The Laffer Curve What will happen t

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    Appendix: The Importance of Incenti

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    ___ 4. A decrease in government exp

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    2. Explain what automatic stabilize

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    Chapter 10 Money, Money Creation, a

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    Example 4B: The castaways on Gillig

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    Looking at the balance sheet below,

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    Demand-side One-shot Inflation Exam

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    4. Inflation increases uncertainty

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  • Page 183 and 184: Low Mortgage Interest Rates Mortgag
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  • Page 187 and 188: The Bursting of the Housing Bubble
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  • Page 203 and 204: 3. Borrowers do not have to seek ou
  • Page 205 and 206: Appendix: Book Review - “The Age
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  • Page 215 and 216: Example 5: In 2015, Taxpayer A had
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  • Page 237 and 238: The table below shows the economic
  • Page 239 and 240: will increase both Real GDP and per
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  • Page 245 and 246: Chapter 15 Less Developed Countries
  • Page 247 and 248: Example 8: Countries A, B, C, and D
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  • Page 251 and 252: c. Restrictions on international tr
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  • Page 257 and 258: Study Guide for Chapter 15 Chapter
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  • Page 261 and 262: 4. List four ways that governments
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  • Page 267 and 268: Example 6: The graph below illustra
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    Smith was skeptical of government a

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    ___ 4. For Country X, what is the o

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    ___ 18. Frédéric Bastiat’s “P

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    4. On the graph below: (1) What is

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    Chapter 17 Elasticity We are often

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    Example 4A: What is price elasticit

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    Example 5A: Gertie’s Gas and Go i

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    Example 10A: When the price of Good

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    Example 13B: On the graph below, su

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    $7 - 6 - 5 - Price 4 - 3 - 2 - 1 -

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    In the long run, would the deadweig

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    ___ 7. The factors that determine w

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    3. a. Which price (or prices) from

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    Chapter 18 Utility The basic econom

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    Nonetheless, society generally assu

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    Example 9: Capital City operates a

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    Marginal rate of substitution - the

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    The diamond-water paradox is the ob

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    Complete the table below to answer

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    4. The graph below shows indifferen

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    Chapter 19 The Firm The basic econo

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    than contributing to team productio

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    1. Difficulty in raising large amou

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    Corporations also use self-financin

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    Example 24: A blacksmith who produc

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    For financing needs, proprietorship

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    ___ 13. Corporations: a. are comple

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    5. List two things that the absence

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    Chapter 20 Production and Costs The

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    In Example 5B, Birdwell finds that

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    variable cost initially decreases,

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    Quantity TC MC AFC AVC ATC 0 240 X

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    If the scale of operation is increa

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    average total cost. Average fixed c

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    ___ 11. Concerning the cost curves:

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    5. Complete the following cost tabl

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    Chapter 21 Perfect Competition The

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    Even though a perfect competitor ca

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    Example 6C: This example builds on

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    At what price will there be neither

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    Appendix: Perfect Competition in th

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    Multiple Choice: ___ 1. A perfect c

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    ___ 17. Perfect competition: a. req

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    Answers for Chapter 21 Fill-in-the-

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    Chapter 22 Monopoly Of the four mar

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    3. Exclusive ownership of an essent

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    maximizing quantity (4 units) creat

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    $22 - 20 - 18 - 16 - 14 - Deadweigh

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    2. Negotiating, beginning at a high

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    Legal barriers are created by gover

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    ___ 8. The slope of the demand curv

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    Price Quantity 3. List some of the

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    Chapter 23 Monopolistic Competition

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    For Percomp (the perfect competitor

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    Example 7A: The graph below represe

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    Example 9: The Organization of the

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    Example 12 illustrates the dilemma

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    its current price and quantity. The

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    ___ 14. Game theory: a. is a method

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    Answers for Chapter 23 Fill-in-the-

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    Chapter 24 Factor Markets The basic

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    $ $240 - 200 - 160 - 120 - 80 - 40

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    Since producers will attempt to equ

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    2. Differences in nonmoney aspects

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    were his strikeouts, walks, and hom

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    ___ 3. To maximize profits, a produ

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    ___ 19. According to the book, “M

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    Multiple Choice: 1. a. 8. c. 15. d.

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    Chapter 25 Labor Unions The primary

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    The elasticity of demand for union

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    Example 4A: Assume that the graph b

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    Notice from the graph in Example 6

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    Wage Factory A Quantity of Labor S

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    As a cartel, a labor union faces a

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    ___ 10. For a monopsony: a. there i

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    3. The graph below represents a lab

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    Chapter 26 Interest, Present Value,

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    An increase in expected rates of re

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    An asset is valuable because we exp

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    Example 13B: General Ordnance prove

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    Appendix: Present Value Table One f

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    ___ 4. An increase in expected rate

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    Problems: 1. List and explain the t

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    Chapter 27 Market Failure The basic

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    External Benefit If a market genera

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    Example 2: To encourage the consump

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    $100 - 90 - 80 - MSC 70 - $ 60 - 50

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    A common good is nonexcludable. Non

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    Study Guide for Chapter 27 Chapter

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    ___ 5. What government policy would

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    4. Based on the information on the

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    Chapter 28 Public Choice and Govern

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    Candidates and the Median Voter Mod

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    Example 8: According to State and F

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    Example 10: When Elvis Presley was

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    4. Pessimistic bias. This is the te

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    ___ 5. An elected official will: a.

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    2. If a certain policy will yield s

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    Chapter 29 Government Regulation of

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    underproduction is the amount that

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    micromanagement results in business

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    market. They may agree with their c

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    Questions for Chapter 29 Fill-in-th

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    ___ 10. The public interest theory

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    4. List the four types of costs imp

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    Chapter 30 Agriculture and Health C

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    weather may cause bumper crops. Bad

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    Security and Rural Investment Act o

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    Example 12: From 1960 to 2013, the

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    1. NHI would provide universal heal

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    d. Insurance providers are not allo

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    Study Guide for Chapter 30 Chapter

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    Answer questions 7. through 10. by

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    ___ 21. If there were no individual

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    Chapter 31 Income Distribution and

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    Income is more equally distributed

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    over a typical career is the accumu

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    Ideal Income Redistribution The ide

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    Poverty - a family whose income fal

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    Appendix: Income Inequality around

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    How is this story an analogy for th

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    ___ 2. In 2013, the Lowest Income 6

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    Problems: 1. Explain the two primar

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    Absolute advantage - when one natio

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    Fiat money - money by government de

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    Nonrivalrous good - a good for whic

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    Absolute advantage, 16-9 Absolute e

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    “Company town”, 25-6 Comparativ

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    Eli Lilly and Company, 22-1 Emergen

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    Houston, Texas, 15-10 Human capital

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    Market, 3-1, 3-8-9 Market basket, 4

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    Political bias, 9-4, 12-7 Political

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    Short run production, 20-2-3 Short-

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    Upturns, 9-4 USDA, 27-9, 30-1-2, 30

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