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# Holt 7525-9 S15_IT

## At a quantity of five,

At a quantity of five, the MC is 140. So the TC of five units must be the 600 TC of four units plus the 140 MC of unit five. Thus, the TC of five units is 740. ATC = TC ÷ Q. If TC is 740 and Q is 5, ATC is 148. AVC can be calculated as before: If AFC = 48 and ATC = 148, AVC must be 100. The table below is updated for the newly calculated costs at a quantity of five. Quantity TC MC AFC AVC ATC 0 240 X X X X 1 300 60 240 60 300 2 380 80 120 70 190 3 480 100 80 80 160 4 600 120 60 90 150 5 740 140 48 100 148 6 ____ ____ 40 ____ 150 At a quantity of six, the ATC is 150. The formula for computing ATC (ATC = TC ÷ Q) can be adjusted to solve for TC. The formula would now be TC = ATC x Q. Thus, TC at a quantity of six is 150 x 6 = 900. MC is the increase in TC. So if the TC of five units is 740 and the TC of six units is 900, the MC of unit six must be 160. AVC can be calculated as before: If AFC = 40 and ATC = 150, AVC must be 110. The table below is updated for the newly calculated costs at a quantity of six. Quantity TC MC AFC AVC ATC 0 240 X X X X 1 300 60 240 60 300 2 380 80 120 70 190 3 480 100 80 80 160 4 600 120 60 90 150 5 740 140 48 100 148 6 900 160 40 110 150 Appendix: The Long Run, Economies of Scale, and Minimum Efficient Scale This chapter has focused on short run production, because most production decisions are made in the short run (a period in which at least one input is fixed). But long run production decisions are also important. The long run is a period in which all inputs can be varied. In the long run, a firm can increase or decrease the scale (size) of its operations. The scale of operations chosen will depend on the occurrence of economies or diseconomies of scale. Economies of scale – occur when a firm’s average total cost decreases as the scale of its operation increases. Diseconomies of scale – occur when a firm’s average total cost increases as the scale of its operation increases. As a firm increases the scale of its operation, average total cost will typically decrease up to a point, as the firm is able to take better advantage of specialization of labor and more extensive use of capital. Example 8: The first container ship, launched in 1956, carried 58 containers with a total of about 130,000 cubic feet of storage space. The largest container ships today can carry over 18,000 containers with a total of about 23,000,000 cubic feet of storage space. As the size of container ships has increased, the productivity (amount of cargo transported) has increased faster than the costs of transporting the cargo, resulting in a decrease in average total cost. When the storage size of a container ship is doubled, the amount of fuel it consumes per trip and the size of the crew needed to operate it will not double. FOR REVIEW ONLY - NOT FOR DISTRIBUTION Production and Costs 20 - 8

If the scale of operation is increased too much, diseconomies of scale will occur. Diseconomies of scale typically occur because large size creates problems of communication, coordination, and control. Example 9: A restaurant with seating for 200 patrons may be taking good advantage of economies of scale, with a specialized labor force and a well-equipped kitchen. But a restaurant with seating for 2,000 patrons would likely be unmanageably large, due to communication, coordination, and control problems. The extent to which economies of scale exist will affect the number of competitors in an industry. To compete effectively, each firm will need to achieve the minimum efficient scale. Minimum efficient scale – the smallest scale of operation that will allow a firm to achieve minimum long run average total cost. If the minimum efficient scale in an industry is relatively small, there will likely be many small producers in the industry, e.g. restaurants in a large city. If the minimum efficient scale is relatively large, there will be a few large producers, e.g. commercial airplane manufacturing. Appendix: Total Revenue, Total Cost, and Break-Even This chapter has focused on production and costs of production. Emphasis has been placed on the marginal cost of production and on the average costs of production. These costs will be emphasized in Chapter 21 as we look at the profit-maximization rule. Our understanding of fixed costs, variable costs, and total cost can be enhanced by examining these cost curves on a graph. We will also include a total revenue curve and a marginal revenue curve. We will identify the break-even quantity (where total revenue and total cost are equal) and the profit-maximizing quantity (where marginal revenue and marginal cost are equal). Total revenue is equal to the selling price of the output multiplied by the quantity sold. Marginal revenue is the change in total revenue from selling an additional unit of output. Example 10: Refer back to Example 6. Assume that Robin Birdwell can sell the luxury birdhouses for \$85 each. The table below shows the costs of production, total revenue, marginal revenue (explained in Chapter 21) and profit. The graph on the next page illustrates the fixed cost curve, the variable cost curve, the total cost curve, the marginal cost curve, the total revenue curve, and the marginal revenue curve. Birdhouse Total Fixed Variable Marginal Marginal Total Quantity Cost Cost Cost Cost Revenue Revenue Profit 0 \$120 \$120 \$0 X X \$0 \$-120 1 160 120 40 \$40 \$85 85 -75 2 190 120 70 30 85 170 -20 3 230 120 110 40 85 255 25 4 285 120 165 55 85 340 55 5 360 120 240 75 85 425 65 6 460 120 340 100 85 510 50 7 590 120 470 130 85 595 5 8 755 120 635 165 85 680 -75 On the graph on the next page, the break-even quantity occurs where total revenue and total cost are equal (where the TR curve and the TC curve intersect). The break-even quantity for Robin Birdwell occurs between two and three birdhouses. We will see in Chapter 21 that the profitmaximizing quantity occurs where marginal revenue and marginal cost are equal (where the MR curve and the MC curve intersect). This intersection occurs between five and six birdhouses. Thus, the profit-maximizing quantity for Robin Birdwell is five birdhouses. FOR REVIEW ONLY - NOT FOR DISTRIBUTION 20 - 9 Production and Costs

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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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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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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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