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# Holt 7525-9 S15_IT

## Example 11: Professor

Example 11: Professor wants to hire 10 students to participate in a research project. When Professor offers to pay \$20 per student, only two students are willing to participate in the project. The supply of students is indicated on the supply schedule and the supply curve below: Payments Quantity of Students \$60 - \$20 2 50 - S 30 40 4 6 \$ 40 - 30 - 50 8 20 - 60 10 10 - 0 0 2 4 6 8 10 Quantity of Students To attract 10 students to the project, Professor has to pay each student \$60. The first two students, who were willing to supply their labor for \$20, are receiving economic rent of \$40. For the group of students, the economic rent is the area above the supply curve and below the payment amount (\$60). There is often a connection between the payment to a factor and the price of what the factor produces. Example 12A: The head football coach at Local High School is paid \$55,000 per year, and tickets to the high school games are \$5. The head football coach at State University is paid \$3 million per year, and tickets to the university games are \$90. Does the high salary of the university coach cause the high ticket prices to the university’s games? No. The cause and effect runs in the other direction. The high ticket prices cause the high salary. If economic rent for a factor is high, it is because the demand for what the factor produces is high. Example 12B: If the head football coach at State University agrees to coach for free during the upcoming season, would the university lower its ticket prices? Not if the stadium sells out at \$90 per ticket. Functions of Economic Rent Though economic rent is a payment in excess of opportunity costs, it is not an unnecessary payment. Economic rent performs two functions: 1. Economic rent allocates resources to their most valuable use. Example 13A: General Horatio Ordnance retires after a distinguished military career. General Ordnance hopes to pursue a new career as a public speaker. He decides to make five public speaking appearances each month. He receives offers for two hundred speaking appearances each month. He accepts the speaking engagements that pay the most. The General’s desire for economic rent allocates his labor to its most valuable use. FOR REVIEW ONLY - NOT FOR DISTRIBUTION 2. Economic rent provides incentive for resource owners to develop the productivity of their resources. Interest, Present Value, Rent, and Profit 26 - 6

Example 13B: General Ordnance proves to be a poor public speaker. Soon the fees offered to him drop to a low level. General Ordnance trains with a public speaking coach, and develops into a dynamic speaker. The fees offered to General Ordnance increase. The General’s desire for economic rent provided the incentive for the General to improve the productivity of his labor. Economic Profit Economic profit is the difference between total revenue and total costs, both explicit and implicit. It is difficult for a perfect competitor to earn economic profit in the long run. Economic profit attracts new competitors into a market, driving market price down, and eliminating economic profit. But a firm may be able to tap into one of the four sources of economic profit: 1. Arbitrage. Arbitrage refers to buying at a low price in one market and selling at a higher price in another market. Arbitrage opportunities tend to be short-lived, as entrepreneurs rush in to take advantage of them. Example 14: A hurricane is forecast to strike Savannah, Georgia within 48 hours. The price of plywood in Savannah triples. Abby Arbitrager buys plywood in Atlanta at its normal price and ships it to Savannah where she sells it, earning economic profit. 2. Uncertainty. Most people prefer certain income to uncertain income. A person may be willing to accept greater uncertainty, if there is a chance of greater than normal profit. Example 15: Carlos is a chef at an upscale restaurant. Carlos is paid \$60,000 per year. If Carlos quits his job and starts his own restaurant, he may earn more as a risk-taking entrepreneur than he does as an employee. But he also may earn much less if his restaurant fails. 3. Innovation. An entrepreneur who is innovative (develops new products, more efficient production techniques, etc.) can earn an economic profit. It is difficult to continue to be an innovative entrepreneur, because one’s competitors are also trying to be innovative. Example 16: Farmer Reuben Goldberg designs an elaborate and time-saving system for gathering the eggs laid by his 10,000 hens. Farmer Goldberg’s innovation may enable him to earn an economic profit. 4. Monopoly profits. If a firm can establish and maintain a monopoly position, it may be able to earn an economic profit in both the short run and the long run. Example 17: Kathleen “Kitty” Russell is the owner of the Long Branch Saloon, the only drinking establishment in Dodge City. Because of Kitty’s influence with the town council, no other licenses to serve alcohol are granted in Dodge City. Kitty’s monopoly position will allow her to earn economic profit. Profit as a Signal Profit acts as a signaling device in a market economy. Profit attracts entrepreneurs and resources into markets of growing consumer demand. Example 18: A hurricane is forecast to strike Savannah within 48 hours. The demand for plywood dramatically increases. Plywood sellers respond to the increased demand by increasing the price of plywood dramatically. The profit for plywood sellers skyrockets. Should this type of “price gouging” be allowed? Yes! The high profit will signal entrepreneurs to ship plywood to Savannah, which is where it is most needed. Plywood will continue to be shipped to Savannah as long as economic profit is available. If the city of Savannah passes an ordinance prohibiting price increases due to hurricanes, the price of plywood will not rise, the profit in the plywood industry will not increase, and entrepreneurs will have no motivation to ship plywood to Savannah. And residents of Savannah will be unable to buy the plywood that they need. FOR REVIEW ONLY - NOT FOR DISTRIBUTION 26 - 7 Interest, Present Value, Rent, and Profit

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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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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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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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Other Benefits of Free Internationa

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Example 6: The graph below illustra

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is only 25% as productive as before

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Smith was skeptical of government a

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___ 4. For Country X, what is the o

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___ 18. Frédéric Bastiat’s “P

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4. On the graph below: (1) What is

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Chapter 17 Elasticity We are often

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Example 4A: What is price elasticit

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Example 5A: Gertie’s Gas and Go i

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Example 10A: When the price of Good

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Example 13B: On the graph below, su

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\$7 - 6 - 5 - Price 4 - 3 - 2 - 1 -

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In the long run, would the deadweig

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___ 7. The factors that determine w

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3. a. Which price (or prices) from

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Chapter 18 Utility The basic econom

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Nonetheless, society generally assu

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Example 9: Capital City operates a

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Marginal rate of substitution - the

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The diamond-water paradox is the ob

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Complete the table below to answer

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4. The graph below shows indifferen

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Chapter 19 The Firm The basic econo

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than contributing to team productio

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1. Difficulty in raising large amou

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Corporations also use self-financin

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Example 24: A blacksmith who produc

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For financing needs, proprietorship

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___ 13. Corporations: a. are comple

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5. List two things that the absence

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Chapter 20 Production and Costs The

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In Example 5B, Birdwell finds that

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variable cost initially decreases,

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Quantity TC MC AFC AVC ATC 0 240 X

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If the scale of operation is increa

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average total cost. Average fixed c

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___ 11. Concerning the cost curves:

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5. Complete the following cost tabl

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Chapter 21 Perfect Competition The

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Even though a perfect competitor ca

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Example 6C: This example builds on

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At what price will there be neither

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Appendix: Perfect Competition in th

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Multiple Choice: ___ 1. A perfect c

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___ 17. Perfect competition: a. req

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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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• Page 381 and 382: Example 7A: The graph below represe
• Page 383 and 384: Example 9: The Organization of the
• Page 385 and 386: Example 12 illustrates the dilemma
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• Page 389 and 390: ___ 14. Game theory: a. is a method
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• Page 393 and 394: Chapter 24 Factor Markets The basic
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• Page 409 and 410: Chapter 25 Labor Unions The primary
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• Page 427 and 428: An increase in expected rates of re
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• Page 435 and 436: ___ 4. An increase in expected rate
• Page 437 and 438: Problems: 1. List and explain the t
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• Page 447 and 448: A common good is nonexcludable. Non
• Page 449 and 450: Study Guide for Chapter 27 Chapter
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• Page 461 and 462: Example 10: When Elvis Presley was
• Page 463 and 464: 4. Pessimistic bias. This is the te
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• Page 467 and 468: 2. If a certain policy will yield s
• Page 469 and 470: Chapter 29 Government Regulation of
• Page 471 and 472: underproduction is the amount that
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• Page 479 and 480: ___ 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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“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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