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Holt 7525-9 S15_IT

Public Goods Most of the

Public Goods Most of the goods that we produce and consume are private goods. Private goods are rivalrous in consumption and excludable. Some goods that we demand are public goods. Public goods – nonrivalrous in consumption and nonexcludable. A good is rivalrous in consumption if consumption by one person prevents or interferes with consumption by another person. A good is nonrivalrous in consumption if consumption by one person does not hinder consumption by others. Example 10: Professor eats the last three slices of leftover pizza. Professor’s three kids are upset that there is no pizza left for them. Pizza is a rivalrous good. Example 11: Professor sits on his patio and watches a beautiful sunset. Professor’s kids do not complain that he is “watching up all the sunset”. A sunset is a nonrivalrous good. A good is excludable if nonpayers can easily be excluded from consuming the good. A good is nonexcludable if nonpayers cannot easily be excluded from consuming the good. Example 12: Professor craves a candy bar from the vending machine. But Professor has no money (a painfully common occurrence). Professor will be excluded from consuming a candy bar. A candy bar is an excludable good. Example 13: Professor fails to pay his income taxes. (Note to IRS: Only kidding!) Professor will be just as protected by national defense as those who pay their taxes. National defense is a nonexcludable good. A private market will produce private goods because the producer can easily exclude nonpayers from consumption. People who want to consume the good will have to pay for consumption. This allows the private producer to generate income to attempt to cover production costs (and maybe even earn a profit). A private market will not produce public goods because the producer cannot easily exclude nonpayers from consumption. Once the public good is produced, people who want to consume the good will not have to pay for consumption. Thus, the private producer cannot earn income to attempt to cover production costs. Because a public good is nonexcludable, consumers can obtain the benefit of the good without paying for it. This is the free rider problem. Thus, public goods must be produced by the government. The government (through taxation) can compel consumers of a public good to help pay to cover production costs. Common Goods Private goods are rivalrous in consumption and excludable. Public goods are nonrivalrous and nonexcludable. A third possibility is common goods. Common goods – rivalrous in consumption and nonexcludable. A common good is rivalrous in consumption. Consumption by one person prevents or interferes with consumption by another person. Example 14: Lake Springfield is home to a rare and exotic breed of fish called the Monty. The Monty is orange and has three eyes. If Homer fishes ten Montys from Lake Springfield, this reduces the number of Montys available for others to catch. FOR REVIEW ONLY - NOT FOR DISTRIBUTION Market Failure 27 - 8

A common good is nonexcludable. Nonpayers cannot easily be excluded from consuming the good. Example 15: Fishing in Lake Springfield has never been subject to restrictions. The lake has never been popular for fishing. People complain that the fish taste funny. So there has never been a reason to incur the cost of placing limitations on how many fish any one person can catch from the lake. There were never so many fish removed from the lake to significantly affect the fish population. Because a common good is nonexcludable, consumers will tend to overconsume the good. Example 16: Due to the publicity it receives from a popular television show, the Monty has become a valuable fish. Aquariums will pay hundreds of dollars for each one. Unfortunately, Montys are unable to reproduce in any environment other than Lake Springfield. Something in the water. Ideally, the Monty would be fished out of Lake Springfield no faster than it can reproduce and sustain its population. If Lake Springfield were privately owned, its owner would be motivated to avoid overfishing. But since the lake is a common good, each person who fishes the lake will be motivated to catch all the Montys that they can before someone else catches them all. The Monty will be fished to extinction. The tendency to overconsume common goods is called the “tragedy of the commons”. Historical examples include the hunting to extinction of the passenger pigeon (which was once the most common bird in North America) and the hunting to near-extinction of the American Bison. Other examples include traffic congestion, overfishing the oceans, overcrowded National Parks, and environmental degradation. The tragedy of the commons can be analyzed as an externality problem. Each person who consumes a common good is receiving a private benefit and generating both a private cost and an external cost (the reduction of the amount of the common good available for others to consume). As long as the marginal private benefit exceeds the marginal private cost, the person will continue to consume. Example 17: As long as the benefit to Homer of catching one more Monty from Lake Springfield exceeds the cost to Homer, he will continue to catch more Montys. He will ignore the external cost that he is imposing on others. The tragedy of the commons can also be analyzed as a type of prisoners’ dilemma. Example 18: All of the people fishing for Montys in Lake Springfield would benefit if they could agree to limit their catch in order to sustain the Montys in the lake. However, each person’s dominant strategy is to catch as many Montys as possible, whether other people stick to the agreement or break it. One way to solve the tragedy of the commons is to turn the common good into a privately owned good. Example 19: If Lake Springfield were privately owned, its owner would be motivated to avoid overfishing in order to sustain the population of Montys. Example 20: According to the USDA, about 35 million cattle are slaughtered in the U.S. each year. Yet there is no concern that cows will become extinct. Another way to solve the tragedy of the commons is by government regulation or taxation to prevent overconsumption. FOR REVIEW ONLY - NOT FOR DISTRIBUTION 27 - 9 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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    ___ 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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    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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