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Holt 7525-9 S15_IT

Example 6B: The graph

Example 6B: The graph below illustrates the market for a farm product. The initial equilibrium price is $4, and the equilibrium quantity is 1,600 units. The government establishes a target price of $6. At this price, quantity supplied increases to 2,000 units. Since there is no price floor in place, the market price is free to adjust downward to achieve equilibrium. The market price will fall to $2 in order to achieve a quantity demanded equal to the quantity supplied (2,000 units). There is no surplus, but the government must make a deficiency payment to farmers of $4 per unit. The cost of the deficiency payment is $8,000 ($4 x 2,000 units). Price $8 - 7- 6- 5- 4- 3- 2- 1- D 0 0 400 800 1200 1600 2000 2400 2800 The FAIR Act of 1996 Quantity S Deficiency Payment In 1996, the Federal Agricultural Improvements and Reform (FAIR) Act was enacted. The Act was an attempt to reduce the federal government’s role in subsidizing farmers, and to eventually eliminate most government subsidies to farmers. The Act eliminated supply restrictions and target prices. These were replaced by production flexibility contract payments (a direct subsidy). The subsidies under the FAIR Act were scheduled to decrease each year, ending completely after 2002. Instead extra subsidy payments were made in 1998, 1999, 2000, and 2001. The FAIR Act was supposed to gradually phase out the government’s role in agriculture. The Act was intended to provide a transition period for farmers to move from government-subsidized farming to free market farming. Government subsidies were scheduled to end after 2002. Instead, the federal government enacted the Farm Security and Rural Investment Act of 2002 The Farm Acts of 2002, 2008, and 2014 The Farm Security and Rural Investment Act of 2002 renewed the federal government’s major role in agricultural markets. The Act provided larger subsidies to farmers than provided by the FAIR Act. Subsidies were provided largely through three programs: (1) direct payments, which were a subsidy similar to the production flexibility contract payments provided in the 1996 Act, (2) counter-cyclical payments, which were similar to traditional target prices, and (3) nonrecourse commodity loans, which have an effect similar to the traditional price floor. FOR REVIEW ONLY - NOT FOR DISTRIBUTION The Food, Conservation, and Energy Act of 2008 continued the federal government’s major role in agricultural markets. The Act continued the three major subsidy programs provided in the Farm Agriculture and Health Care 30 - 4

Security and Rural Investment Act of 2002. The Act also created a new Average Crop Revenue Election (ACRE) program, which was a type of revenue guarantee. The Act also provided more funding for food assistance programs, conservation and farmland protection programs, and renewable energy development programs. President Bush vetoed the 2008 Farm Bill, citing its high cost, market distortions, numerous earmarks, and continuing subsidies for wealthy farmers. Congress easily overrode the President’s veto. The Agricultural Act of 2014 continued the federal government’s major role in agricultural markets, but changed the approach, de-emphasizing direct subsidies and increasing the role of crop insurance. The Act ended direct payments, counter-cyclical payments, and the ACRE program. Instead, farmers must choose between a Price Loss Coverage program, which has a similar effect to target pricing, and an Agricultural Risk Coverage program, which pays farmers when revenues decline below a certain point. The 2014 Act continues the use of nonrecourse commodity loans, which have an effect similar to the traditional price floor. The 2014 Act increases the government subsidy for crop insurance. Crop insurance has a similar effect to target pricing. The Agricultural Act of 2014 continues import restrictions on certain farm products (e.g. sugar). Import restrictions benefit domestic farmers at the expense of domestic consumers. Import restrictions are an inefficient way to redistribute income (see Chapter 16). Import restrictions on farm products also impose a loss on foreign farmers. U.S. farm policies have been a stumbling block in World Trade Organization negotiations. Less developed countries are hesitant to reduce their trade restrictions on manufactured goods and agricultural commodities when the U.S. and other developed countries are unwilling to reduce their farm support policies. Some Comments on the Government’s Agricultural Policies It is hard, from an economic standpoint, to find anything good to say about the federal government’s farm policies. On the negative side, the policies are economically inefficient, misallocating resources. The higher food prices caused by the government’s farm policies amount to a hidden tax on consumers. The higher food prices are a greater burden on lower income households than on higher income households, since lower income households spend a larger percentage of their incomes on food. The government’s farm policies exemplify successful rent seeking by a powerful special-interest group. The policies are essentially welfare payments received mainly by the higher-income farmers and paid for by both taxpayers and consumers. Example 7: According to the USDA, in 2009, 792,645 farms received government payments. Small farms (average farm net income of about $15,000) made up 73% of the farms and received 20% of government payments. Mid-size farms (average farm net income of about $93,000) made up 19% of the farms and received 28% of government payments, and large farms (average farm net income of about $219,000) made up 8% of the farms and received 52% of government payments. There are two good things that we can say about the federal government’s farm policies: 1. They are not as bad as the farm policies of many other countries. Many other countries subsidize their farmers even more heavily than the U.S. subsidizes its farmers. Example 8: For 2013, the Organisation for Economic Co-operation and Development estimated that, for the United States, 8% of the value of farm production came from government support. The percentage of the value of farm production coming from government support was 23% for the European Union, 63% for Japan, 76% for Switzerland, and 80% for Norway. FOR REVIEW ONLY - NOT FOR DISTRIBUTION 2. They don’t work. The less efficient farmers still eventually go broke. The amount of resources devoted to agriculture still eventually decreases. These things must happen in order for the limited resources to be allocated to their most valuable uses. 30 - 5 Agriculture and Health Care

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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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    $ $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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  • Page 445 and 446: $100 - 90 - 80 - MSC 70 - $ 60 - 50
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  • Page 451 and 452: ___ 5. What government policy would
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  • Page 457 and 458: Candidates and the Median Voter Mod
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  • Page 471 and 472: underproduction is the amount that
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  • Page 475 and 476: market. They may agree with their c
  • Page 477 and 478: Questions for Chapter 29 Fill-in-th
  • Page 479 and 480: ___ 10. The public interest theory
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  • Page 485: weather may cause bumper crops. Bad
  • Page 489 and 490: Example 12: From 1960 to 2013, the
  • Page 491 and 492: 1. NHI would provide universal heal
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  • Page 497 and 498: Answer questions 7. through 10. by
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  • Page 501 and 502: Chapter 31 Income Distribution and
  • Page 503 and 504: Income is more equally distributed
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  • Page 507 and 508: Ideal Income Redistribution The ide
  • Page 509 and 510: Poverty - a family whose income fal
  • Page 511 and 512: Appendix: Income Inequality around
  • Page 513 and 514: How is this story an analogy for th
  • Page 515 and 516: ___ 2. In 2013, the Lowest Income 6
  • Page 517 and 518: Problems: 1. Explain the two primar
  • Page 519 and 520: Absolute advantage - when one natio
  • Page 521 and 522: Fiat money - money by government de
  • Page 523 and 524: Nonrivalrous good - a good for whic
  • Page 525 and 526: Absolute advantage, 16-9 Absolute e
  • Page 527 and 528: “Company town”, 25-6 Comparativ
  • Page 529 and 530: Eli Lilly and Company, 22-1 Emergen
  • Page 531 and 532: Houston, Texas, 15-10 Human capital
  • Page 533 and 534: Market, 3-1, 3-8-9 Market basket, 4
  • Page 535 and 536: 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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