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3. Changes in real

3. Changes in real interest rates. If one nation’s real interest rates increase relative to another nation’s real interest rates, this will change the exchange rate for the two nations’ currencies. The currency of the increasing-real interest rates nation will appreciate versus the currency of the decreasing-real interest rates nation. Example 18: If real interest rates in the U.S. increase relative to real interest rates in Canada, the exchange rate of the U.S. dollar will appreciate relative to the Canadian dollar. 4. Changes in foreign investment attractiveness. If one nation’s attractiveness to foreign investors increases relative to another nation’s attractiveness to foreign investors, this will change the exchange rate for the two nations’ currencies. The currency of the increasingattractiveness nation will appreciate versus the currency of the decreasing-attractiveness nation. Example 19: If foreign investment attractiveness for the U.S. increases relative to foreign investment attractiveness for Canada, the exchange rate of the U.S. dollar will appreciate relative to the Canadian dollar. Appendix: International Trade and Economic Growth in China and India China and India are the two most populous countries in the world, with a combined population in 2014 of about 2.6 billion people, or about 36% of the world’s population. Both nations underwent large political changes in the late 1940s. In China, the communist revolution took place in 1949. In India, independence from the United Kingdom was achieved in 1947. Both nations had economies that were relatively closed to international trade for the next few decades after these major changes. Both nations’ economies performed poorly during this time. In 1980, each country had a per capita Real GDP (measured in 2005 dollars) of about $1,000. China began to move toward a more market-oriented economy, actively pursuing international trade in the late 1970s. India followed a similar path beginning in 1991. The economic results have been spectacular for China and very good for India. China had average tariff rates of about 50% in 1980 and average tariff rates of only about 10% in 2010. India had average tariff rates of almost 80% in 1990 and average tariff rates of only about 13% in 2010. China’s international trade totaled about $20 billion in 1980, and had grown to over $3 trillion by 2010. India’s international trade totaled about $40 billion in 1990 and had grown to about $575 billion by 2010. In China, per capita Real GDP increased by 614% between 1980 and 2010. In India, per capita Real GDP increased by 143% between 1990 and 2010. (Tariff information is from the “Economic Freedom of the World, 2013 Annual Report”. Per capita Real GDP information is from the Penn World Tables.) Appendix: Book Review – “The Wealth of Nations, Book 4” In Book 4 of his 1776 book “An Inquiry into the Nature and Causes of the Wealth of Nations”, Adam Smith addresses international trade. In Chapter 2 of Book 4, Smith discusses restraints on imports. Smith asserts that restraints on imports divert resources from one direction to another. But it seems unlikely that this diversion will be advantageous to society. According to Smith, every individual attempts to employ his resources to produce the greatest possible value. By doing this, the best interest of society is also promoted. Quoting Smith: “…every individual, therefore, endeavours as much as he can…to direct that industry that its produce may be of the greatest value…He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it…he intends only his own gain, and he is in this, as in many other cases, 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 the society more effectually than when he really intends to promote it.” FOR REVIEW ONLY - NOT FOR DISTRIBUTION International Trade 16 - 10

Smith was skeptical of government attempts to divert resources from the course of employment chosen by individual resource owners. Quoting Smith: “…which produce is likely to be of the greatest value, every individual, it is evident, can, in his local situation, judge much better than any statesman or lawgiver can do for him. The statesman, who should attempt to direct private people in what manner they ought to employ their capitals, would not only load himself with a most unnecessary attention, but assume an authority which could safely be trusted, not only to no single person, but to no council or senate whatever, and which would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it.” Instead of restraining trade, nations should behave like prudent householders. Quoting Smith: “It is the maxim of every prudent master of a family, never to attempt to make at home what it will cost him more to make than to buy…What is prudence in the conduct of every private family, can scarce be folly in that of a great kingdom. If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry, employed in a way in which we have some advantage.” In Chapter 8 of Book 4, as Smith was concluding his discussion of the mercantile system, he wrote of the interests of the consumers versus the interests of the producers. Quoting Smith: “Consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to, only so far as it may be necessary for promoting that of the consumer.” Study Guide for Chapter 16 Chapter Summary for Chapter 16 The U.S. is the world’s largest international trader. In recent years, the U.S. has had large trade deficits. A trade deficit occurs when a nation’s imports exceed its exports. People in different nations trade with each other to benefit themselves. The law of comparative advantage states that trade between nations is beneficial to both if there is a difference in opportunity costs. Specializing and trading according to comparative advantage allows for more production from the same amount of resources, and is a type of technological advance. In a free market, profit-seeking will lead to production and trade according to comparative advantage. In order for international trade to follow comparative advantage, the governments of the nations involved need to do nothing. Along with the gain that arises from producing and trading according to comparative advantage, free international trade results in other benefits. Free international trade; (1) extends markets, which allows for economies of scale and greater returns to innovation, (2) increases competition, (3) speeds the flow of technological advances, (4) gives consumers access to more variety, and (5) improves international relations. Though nations benefit overall from free international trade, domestic producers who face increased competition from imports may suffer losses. Thus, domestic producers may seek governmentally imposed restrictions on trade, such as a tariff (a tax on an imported good) or a quota (a legal limit on the quantity of a good that may be imported). A trade restriction will allow domestic producers to sell a greater quantity at a higher price, thus receiving more producer’s surplus. A trade restriction will cause domestic consumers to buy a lesser quantity at a higher price, thus receiving less consumer’s surplus. The consumer loss caused by trade restrictions exceeds the producer gain caused by trade restrictions. Thus, a trade restriction causes a net loss to the nation imposing the restriction. A trade restriction will FOR REVIEW ONLY - NOT FOR DISTRIBUTION 16 - 11 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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    of $5 and a quantity of 10 units. T

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    The complexity of the tax law also

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  • Page 239 and 240: will increase both Real GDP and per
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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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