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Holt 7525-9 S15_IT

The Politics of Trade

The Politics of Trade Restrictions Trade restrictions are economically inefficient. Then why are they imposed? There is a political reason that trade restrictions are imposed: Though the consumer loss caused by trade restrictions exceeds the producer gain caused by trade restrictions, the benefits of trade restrictions are concentrated on a few producers, while the costs of trade restrictions are dispersed over many consumers. We will see in Chapter 28 that elected officials will tend to favor policies that yield concentrated benefits and impose dispersed costs. Example 7: If the gain to domestic producers from a trade restriction is $100 million, and there are five domestic producers, the average producer gain is $20 million. The domestic producers will be motivated to lobby the government, to make campaign contributions, and to engage in public relations efforts in order to gain the trade restriction. The loss to domestic consumers will be larger than the gain to domestic producers. If the loss to domestic consumers is $200 million, and there are 10 million domestic consumers, the average consumer loss is $20. The consumers will be much less motivated to work to eliminate the trade restriction. In fact, the average consumer will probably be unaware of (rationally ignorant of) the loss imposed by the trade restriction. Arguments for Trade Restrictions Trade restrictions are imposed to redistribute income from the many (often uninformed) consumers to the few (politically active) producers. (This is an example of rent seeking. See Chapter 22.) It would be bad public relations (and bad politics) to defend trade restrictions as a highly inefficient welfare plan, so arguments have been developed to justify trade restrictions. 1. National defense argument. This argument says that national defense concerns may require certain trade restrictions. The economic cost of the trade restrictions is trumped by the national defense concerns. The U.S. would not be wise to export weapons to nations that might use those weapons against the U.S. Example 8: A U.S. defense contractor has an opportunity to make a profitable sale of advanced weapons to North Korea. The U.S. government would not permit this export sale to take place, because of the potential harm to national security. But the national defense argument has been used to justify restrictions on a wide variety of imports in order to maintain domestic production for “defense purposes”. Often the goods are not really crucial to defense (e.g. shoes). Where goods are crucial to defense, it is usually more economically efficient to stockpile imports during peacetime, rather than to maintain a high-cost domestic industry. 2. Infant industry argument. This argument can be traced back to the first U.S. Secretary of the Treasury, Alexander Hamilton. Hamilton argued that new or “infant” industries need temporary protection from foreign competition so that they can mature and become competitive. However, if an “infant” domestic industry has the potential to become competitive, it doesn’t really need temporary protection from foreign competition. Investors are willing to suffer short run losses in hopes of long run profits. And, if “temporary” protection is granted to an industry, the domestic producers may never become competitive with foreign producers since they are being shielded from competition with the foreign producers. Thus, it may never be politically feasible to remove the “temporary” protection. FOR REVIEW ONLY - NOT FOR DISTRIBUTION 3. Unfair foreign competition argument. Domestic producers may suffer in the face of foreign competitive practices that put the domestic producers at an unfair disadvantage. a. Dumping is the practice of selling exports at a price below the price charged in the home market. If foreign companies dump goods in the U.S. market, this puts U.S. producers at a International Trade 16 - 6

competitive disadvantage. But dumping will mean lower prices for U.S. consumers and a net gain to the U.S. economy. The U.S. will be obtaining the goods at a lower cost than the cost of producing the goods in the U.S. b. Foreign governments sometimes subsidize exports, allowing the exports to be sold at a lower price. This puts U.S. producers at a competitive disadvantage. But, as with dumping, foreign subsidies for exports will mean lower prices for U.S. consumers and a net gain to the U.S. economy. 4. Low foreign wages argument. This argument says that American producers cannot compete with foreign producers because American wages are high and foreign wages are low. If domestic producers are not protected from imports, American wages will be driven down to low levels. Example 9: If textile manufacturers in North Carolina have to compete with textile manufacturers in Bangladesh, textile workers in North Carolina will see their wages fall. It is true that wages for workers who are in direct competition with imports may be driven down by the competition. But high wages overall are made possible by high productivity. Restricting trade reduces a nation’s overall productivity. Free international trade increases a nation’s productivity and makes high wages overall possible. 5. Saving domestic jobs argument. Restricting imports can save specific domestic jobs. But protecting noncompetitive jobs interferes with the allocation of labor to its most productive use. And the cost to save the jobs will be greater than what the jobs are worth. Example 10: Restrictions on imported sugar impose a net loss on the U.S. economy of about $1 billion per year and save about 2,000 U.S. jobs, for an annual cost per job saved of about $500,000. (Information on the net loss is from research by Michael Wohlgenant. Information on the number of jobs saved is from the International Trade Commission.) Also remember from Chapter 4 that technological advance destroys jobs. International trade is a type of technological advance and thus destroys jobs. But job destruction is good. Job destruction frees up labor for new types of production. The destruction of jobs allows the newly unemployed labor to be re-allocated to more valuable production. Example 11: In the last forty years, imports have nearly quadrupled as a portion of the U.S. economy. Yet the nonrecessionary unemployment rate in the U.S. today is similar to what it was forty years ago. The Movement toward Freer Trade Nations that practice relatively free international trade generally experience more economic growth than nations that restrict trade. Example 12: According to the “Economic Freedom of the World, 2013 Annual Report”, the twenty-five percent of nations with the most free economies had a per capita Real GDP over 8 times as high as the twenty-five percent of nations with the least free economies. In recent years, there has been a movement toward freer international trade. Most nations have been reducing tariff rates and easing quotas on imports. As a result, international trade has been a growing part of the world economy. FOR REVIEW ONLY - NOT FOR DISTRIBUTION Example 13: According to the World Bank, the mean tariff rate worldwide was decreased from 26.3 percent in 1986 to 6.8 percent in 2012. Between 1973 and 2012, exports as a share of worldwide GDP increased from 12% to 25%. 16 - 7 International Trade

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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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    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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    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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