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Holt 7525-9 S15_IT

Resource Owner

Resource Owner Motivation In a market economy, the resources are generally owned by private individuals. For instance, each person owns his or her own labor. How do private individuals decide the most desirable use for their resources? Adam Smith addressed this question in his book “An Inquiry into the Nature and Causes of the Wealth of Nations” (published in 1776). According to Smith, “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.” We assume that the basic resource owner motivation is self-interest. Each resource owner will use whatever resources he or she owns to pursue self-interest. But what about the best interest of society? Will the resource owner’s pursuit of self-interest also serve the best interest of society? According to Adam Smith, the resource owner’s pursuit of self-interest will generally serve the best interest of society. According to Smith, the resource owner “intends only his own gain, and he is in this…led by an invisible hand to promote an end which is no part of his intention…By pursuing his own interest he frequently promotes that of society more effectually than when he really intends to promote it.” Why does the resource owner’s pursuit of self-interest generally serve the best interest of society? Most resource owners have a self-interest to generate maximum profit from the use of their resources. In a competitive market, this pursuit of profit-maximization will lead the resource owners toward two actions that serve the best interest of society; 1. Resource owners will direct their resources to the use that is most highly valued by consumers. Example 9: Kris opens a donut shop featuring seaweed-based donuts. Unfortunately, consumers find the donuts unappealing. If Kris wants to stay in business and have a chance to earn a profit, she will have to change her donuts in response to consumer demand. 2. Resource owners will use their resources as efficiently as possible. Example 10: Kris employs only persons with advanced degrees in nutrition at her donut shop. Unfortunately, the high salaries of her employees make her donuts so costly to produce that they are not competitive. If Kris wants to stay in business and have a chance to earn a profit, she will have to use her resources more efficiently. She will have to employ the cheapest available workers who can do an adequate job. She will have to produce donuts at the lowest cost (with the least valuable combination of resources) that she can. These actions serve the best interest of society by helping society to achieve the basic goal in dealing with the problem of scarcity; produce as much consumer satisfaction as possible with the limited resources available. Opportunity Cost The basic economic problem of scarcity means that people have to make choices. How will they use their limited resources? Which of their unlimited wants will they satisfy? As they make these choices, they are foregoing other desirable choices. If resources are used to produce Good A, those resources are not available to produce Good B. If income is spent on Good C, that income is not available to consume Good D. The value of the best alternative surrendered when a choice is made is the opportunity cost of that choice. Opportunity cost – the value of the best alternative surrendered when a choice is made. FOR REVIEW ONLY - NOT FOR DISTRIBUTION Scarcity and Choices 1 - 4

Example 11: When Cindy quits her job at the Sonic to join the Army, her opportunity cost is the income she could earn at the Sonic. When NFL strong safety Pat Tillman gave up his job with the Arizona Cardinals to become an Army Ranger, his opportunity cost was the income he could have earned in the NFL (over $1 million per year). Rationing The basic economic problem of scarcity creates the necessity to ration the limited resources to production and to ration the limited goods to consumption. In the U.S. economy, the primary rationing device is dollar price. Using dollar price as the rationing device means that resources will be rationed to the use that is most highly valued by consumers. And goods will be rationed to the consumers who are willing and able to pay the most for them. Example 12A: Stefani can earn $9 an hour selling t-shirts at Old Navy, or she can earn millions as a popular singer performing concerts. Dollar price will ration Stefani’s labor to the concerts. She generates more consumer satisfaction singing in concert than she does selling t-shirts (as indicated by the higher dollar price she can earn). Example 12B: Stefani performs in concert at a 15,000 seat arena. If admission to the concert were free, 100,000 fans would be willing to attend the concert. Dollar price rations the 15,000 available seats to the consumers who are willing and able to pay the most for them. Marginal Benefits and Marginal Costs The basic economic problem of scarcity requires people to make decisions. You make many economic decisions each day. Will you attend class or put in extra hours at work? Will you buy a candy bar from the vending machine or spend that money elsewhere? Will you stay up late and study for another half hour or go on to bed? Economic decisions are made by comparing the marginal (extra, additional) benefits of a choice with the marginal (extra, additional) costs. Example 13: If the marginal benefit of another half hour of study exceeds the marginal cost of the lost sleep, you study for another half hour. If the marginal cost of the lost sleep exceeds the marginal benefit of the study, you stop studying and go to sleep. Any activity should be continued as long as the marginal benefit of the activity exceeds the marginal cost. The optimal (ideal, most efficient) level of the activity occurs where the marginal benefit and the marginal cost are equal. A more detailed explanation of the optimal level of an activity is given in Chapter 18. Thinking Like an Economist To make sound economic decisions, a person needs to think like an economist. Eight aspects of thinking like an economist are discussed below: 1. Realizing that association does not necessarily indicate causation. In making economic decisions, we often look for cause and effect relationships. If a person studies more, will this cause an improvement in his or her test grade? Association (“I studied more and my test grade improved”) often indicates causation (“My test grade improved because I studied more”). But association does not always indicate causation (“I painted my toenails blue and my test grade improved”). Many superstitions arise because a person believes that association must indicate causation. FOR REVIEW ONLY - NOT FOR DISTRIBUTION Example 14: When Wade Boggs was a rookie with the Boston Red Sox, he had a multi-hit game after eating chicken for his pre-game meal. For the rest of his lengthy major league career, Boggs ate chicken as his pre-game meal. 1 - 5 Scarcity and Choices

  • Page 1 and 2: PRINCIPLES OF ECONOMICS JEFF HOLT S
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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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    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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    “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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    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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    life; it came into existence not by

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    calculated by using the potential d

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    ___ 12. If the required-reserve rat

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    4. Referring to the balance sheet f

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    Chapter 11 The Federal Reserve Syst

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    5. After Bank X sells the $300,000

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    Low Mortgage Interest Rates Mortgag

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    Relaxed Standards for Mortgage Loan

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    The Bursting of the Housing Bubble

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    On February 17, 2009, the federal g

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    Fed policies caused short-term inte

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    ___ 10. The Fed’s most important

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    ___ 25. In response to the recessio

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    Chapter 12 Monetary Policy The basi

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    2. A change in aggregate demand (AD

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    Monetarist Transmission Mechanism C

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    3. Borrowers do not have to seek ou

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    Appendix: Book Review - “The Age

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    Questions for Chapter 12 Fill-in-th

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    ___ 16. The primary source of incom

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    7. According to Alan Greenspan, wha

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    Chapter 13 Taxes, Deficits, and the

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    Example 5: In 2015, Taxpayer A had

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    of $5 and a quantity of 10 units. T

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    The complexity of the tax law also

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    the current government spending and

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    cut of 1964. The top rate was lower

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    ___ 6. Federal excise taxes: a. are

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    3. How would eliminating the loopho

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    Chapter 14 Economic Growth The basi

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    2. Labor. Labor can contribute to e

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    estricting international trade (e.g

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    An improvement in technology (e.g.

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    The table below shows the economic

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    will increase both Real GDP and per

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    ___ 8. Which of the following is co

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    ___ 26. The opinion that economic g

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    Chapter 15 Less Developed Countries

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    Example 8: Countries A, B, C, and D

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    Obstacles to Economic Development f

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    c. Restrictions on international tr

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    Appendix: Book Review - “The Powe

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    Example 25: In Brazil, about half t

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    Study Guide for Chapter 15 Chapter

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    ___ 13. Among the counterproductive

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    4. List four ways that governments

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    Chapter 16 International Trade The

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    Other Benefits of Free Internationa

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    Example 6: The graph below illustra

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    competitive disadvantage. But dumpi

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    is only 25% as productive as before

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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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