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3. Cultural norms that

3. Cultural norms that hinder economic development. Different cultures have different cultural norms, or standards of behavior and thought. In the U.S., individual economic success is generally seen in a positive light. Most people desire and strive for a higher standard of living. This economic striving is conducive to economic development. LDCs often have cultural norms that are hostile to or hinder economic development. Some cultures are very traditional. The emphasis on maintaining traditional ways hinders the introduction of new technology. A traditional social structure may limit economic activity and mobility among certain groups in the population (e.g. females). Some LDCs have cultures that are very fatalistic. Fatalism is the belief that the course of a person’s life is predetermined. Fatalism has a negative effect on work effort, educational attainment, investment choices, etc. 4. Counterproductive governmental policies. Historical evidence indicates that certain governmental policies are a hindrance to economic development. Nations that have followed these policies have been less successful in achieving economic development than nations that have avoided these policies. Governments in LDCs often follow some or all of these counterproductive policies. The counterproductive policies include: a. Weak private property rights. The importance of strong private property rights to economic growth was detailed in Chapter 14. Weak private property rights not only discourage the development of resources by the domestic economy, they also discourage foreign investment in the domestic economy. Governments of LDCs often weaken private property rights by; (1) Failing to enforce private property rights through criminal and civil law. High rates of crime, corrupt and inefficient court systems, failure to enforce private contracts, and even government expropriation of private property are common problems in LDCs. In LDCs, much of the land and capital may lack clear ownership. In India, for example, about 90 percent of land titles are subject to dispute. (2) Imposing high tax rates. Many LDCs have marginal tax rates of over 50% on relatively low levels of income. Such high tax rates decrease the incentive resource owners have for developing and directing their resources to their most valuable uses. High tax rates also increase the amount of deadweight loss from taxation (see Chapter 13). Research by economist Alvin Rabushka indicates that LDCs with lower marginal tax rates achieve higher economic growth rates than LDCs with higher marginal tax rates. (3) Imposing excessive government regulations. In many LDCs, the regulatory requirements to simply begin a new business can take many months to comply with, involve a large expenditure of money, and may necessitate the payment of bribes to numerous government officials. (4) Permitting excessive government corruption. Governments in LDCs are often not subject to regular, free elections. This makes excessive government corruption more likely. Research indicates that excessive government corruption is associated with low or negative economic growth. Counterproductive economic policies (like excessive government regulations) may be pursued to increase the opportunities for government graft. A table in an appendix at the end of the chapter illustrates the relationship between corruption and standard of living for selected countries. b. Restrictions on competitive markets. In LDCs, large industries are often directly controlled by the state, or a favored producer is granted a monopoly position. Excessive regulations may hinder the entry of new firms into markets. Price controls are often imposed. For more on the importance of competitive markets, see the Appendix on “The Power of Productivity” at the end of this chapter. FOR REVIEW ONLY - NOT FOR DISTRIBUTION Less Developed Countries 15 - 6

c. Restrictions on international trade. Governments in LDCs often impose severe barriers (tariffs and quotas) to international trade. Research indicates that high trade barriers are associated with low or negative economic growth. Governments in LDCs also often maintain a fixed exchange rate that overvalues the domestic currency. This has the effect of acting as a tax on exporters. Research indicates that a fixed exchange rate that significantly overvalues the domestic currency is associated with low or negative growth rates. d. Excessive inflation. Governments in LDCs often pursue rapid money supply growth (in an attempt to keep interest rates low, or to pay for a large budget deficit, or to impose an “inflation tax”). (See the appendix at the end of Chapter 10 on seignorage and inflation.) Rapid money supply growth leads to high inflation. Research indicates that periods of high inflation are associated with low or negative economic growth. During periods of high inflation, governments in LDCs often place price ceilings on nominal interest rates. Price ceilings on nominal interest rates during periods of high inflation can cause real interest rates that are negative. Negative real interest rates have a devastating effect on financial markets. Research indicates that periods of negative real interest rates are associated with low or negative economic growth. e. A large government. LDCs often have governments that are large relative to the size of the nation’s economy. The large government may be caused by a large military (and/or secret police force), or by an excessively large civil service, with positions granted for political patronage purposes. The large government often leads to large budget deficits. Research indicates that large budget deficits are associated with low or negative economic growth. The large government also necessitates high tax rates (discussed earlier). f. Poor provision of public services. Governments in LDCs often provide poor public roads, unreliable electricity delivery, unreliable water delivery, unreliable phone service, and inadequate public health services. The poor provision of public services hinders economic growth. Appendix: U.S. per capita Real GDP (Base 2000) at Different Growth Rates Year 1.0% 1.5% 2.0% 2.5% 2000 $34,759 $34,759 $34,759 $34,759 2010 38,396 40,339 43,218 45,607 2020 42,413 46,815 52,683 58,381 2030 46,850 54,332 64,220 74,732 2040 51,751 63,053 78,285 95,663 2050 57,166 73,176 95,428 122,188 2060 63,147 84,924 116,326 156,756 2070 69,753 98,557 141,801 200,660 2080 77,051 114,390 172,854 256,862 2090 85,112 132,743 210,709 328,806 2100 94,017 154,053 256,853 420,899 Appendix: Corruption and Standard of Living The table on the next page contains information for selected countries from the Corruption Perceptions Index for 2013, released by Transparency International. The lower the Corruption Perceptions Index number, the greater the perceived corruption in a country. The table also contains information on per capita GDP for 2013 from the CIA World Factbook. The Top 12 (least corrupt) countries on the table have an average per capita GDP of $42,117. The Bottom 12 (most corrupt) countries on the table have an average per capita GDP of $3,967. FOR REVIEW ONLY - NOT FOR DISTRIBUTION 15 - 7 Less Developed Countries

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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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    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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    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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    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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    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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