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# Holt 7525-9 S15_IT

## Private Market

Private Market Equilibrium Chapter 18 indicated that private market demand depends on the marginal utility consumers expect to receive from consumption. In this chapter, we will refer to the marginal utility of consumers as marginal private benefit (MPB). Marginal private benefit will decrease as more units are consumed due to the law of diminishing marginal utility. Private market supply depends on the marginal cost of production incurred by the producers. In this chapter, we will refer to the marginal cost of producers as the marginal private cost (MPC). Marginal private cost will increase as more units are produced due to the law of diminishing marginal returns. Private market equilibrium will occur where the private market demand curve intersects with the private market supply curve (where marginal private benefit equals marginal private cost). Example 1A: The table below indicates marginal private benefit and marginal private cost for different quantities of output. The graph below illustrates that private market equilibrium (where MPB = MPC) occurs at a quantity of 4 units and a price of \$45. Quantity Marginal Private Benefit Marginal Private Cost 1 \$75 \$15 2 65 25 3 55 35 4 45 45 5 35 55 6 25 65 7 15 75 \$ \$95 - 85 - 75 - 65 - 55 - 45 - 35 - 25 - 15 - Z 0 0 1 2 3 4 5 6 7 Quantity P.M.E. S MPC D MPB Private market equilibrium (P.M.E.) occurs where MPB = MPC. If there are no external benefits, marginal private benefit and marginal social benefit are the same. If there are no external costs, marginal private cost and marginal social cost are the same. Thus, if there are no externalities, the private market equilibrium (where MPB = MPC) is also the optimal quantity (where MSB = MSC). FOR REVIEW ONLY - NOT FOR DISTRIBUTION Market Failure 27 - 2

External Benefit If a market generates an external benefit, the private market will underproduce compared to the optimal quantity. Marginal social benefit will be equal to marginal private benefit plus marginal external benefit. Example 1B: Assume the same facts as Example 1A, except that now the market generates an external benefit of \$20 for each unit consumed. The table below indicates marginal private cost (MPC), marginal private benefit (MPB), marginal external benefit, and marginal social benefit (MSB) for different quantities of output. Marginal social benefit is the sum of marginal private benefit and marginal external benefit. The graph below illustrates that private market equilibrium (where MPB = MPC) occurs at a quantity of 4 units and a price of \$45. The optimal quantity (where MSB = MSC and labeled OPT) occurs at 5 units, which corresponds to a price of \$55. Quantity MPC MPB Marginal External Benefit MSB 1 \$15 \$75 \$20 \$95 2 25 65 20 85 3 35 55 20 75 4 45 45 20 65 5 55 35 20 55 6 65 25 20 45 7 75 15 20 35 \$ \$95 - 85 - 75 - 65 - 55 - 45 - 35 - 25 - 15 - Z 0 0 1 2 3 4 5 6 7 P.M.E. Quantity OPT S MPC D MSB D MPB With an external benefit, the private market equilibrium (where MPB = MPC) will be less than the optimal quantity (where MSB = MSC). External Cost FOR REVIEW ONLY - NOT FOR DISTRIBUTION If a market generates an external cost, the private market will overproduce compared to the optimal quantity. Marginal social cost will be equal to marginal private cost plus marginal external cost. 27 - 3 Market Failure

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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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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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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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• Page 393 and 394: Chapter 24 Factor Markets The basic
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• Page 397 and 398: Since producers will attempt to equ
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• Page 409 and 410: Chapter 25 Labor Unions The primary
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• Page 425 and 426: Chapter 26 Interest, Present Value,
• Page 427 and 428: An increase in expected rates of re
• Page 429 and 430: An asset is valuable because we exp
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• Page 437 and 438: Problems: 1. List and explain the t
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• Page 443 and 444: Example 2: To encourage the consump
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• Page 447 and 448: A common good is nonexcludable. Non
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• 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
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• 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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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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