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Example 4A: What is

Example 4A: What is price elasticity of demand if price changes from $7 to $6? The percentage change in quantity demanded is calculated as the change in quantity demanded (30 – 20 = 10) divided by the average quantity demanded ([30 + 20]/2 = 25) or 10 ÷ 25 = .4000. The percentage change in price is calculated as the change in price (6 – 7 = 1) divided by the average price ([6 + 7]/2 = 6.5) or 1 ÷ 6.5 = .1538. Thus, the price elasticity of demand for a change in price from $7 to $6 is .4000 ÷ .1538 = 2.60. The above calculations can be expressed using the formula, as shown below: Q 2 – Q 1 30– 20 10 (Q 2 + Q 1 )/2 (30+ 20)/2 25 .4000 E D = ————— = —————— = —— = ——— = 2.60 P 2 – P 1 6 – 7 1 .1538 (P 2 + P 1 )/2 (6 + 7)/2 6.5 Example 4B: What is price elasticity of demand if price changes from $6 to $5? Q 2 – Q 1 40– 30 10 (Q 2 + Q 1 )/2 (40+ 30)/2 35 .2857 E D = ————— = —————— = —— = ——— = 1.57 P 2 – P 1 5– 6 1 .1818 (P 2 + P 1 )/2 (5 + 6)/2 5.5 Example 4C: What is price elasticity of demand if price changes from $5 to $4? Q 2 – Q 1 50– 40 10 (Q 2 + Q 1 )/2 (50+ 40)/2 45 .2222 E D = ————— = —————— = —— = ——— = 1.00 P 2 – P 1 4– 5 1 .2222 (P 2 + P 1 )/2 (4 + 5)/2 4.5 Example 4D: What is price elasticity of demand if price changes from $4 to $3? Q 2 – Q 1 60– 50 10 (Q 2 + Q 1 )/2 (60+ 50)/2 55 .1818 E D = ————— = —————— = —— = ——— = .64 P 2 – P 1 3– 4 1 .2857 (P 2 + P 1 )/2 (3 + 4)/2 3.5 Example 4E: What is price elasticity of demand if price changes from $3 to $2? Q 2 – Q 1 70– 60 10 (Q 2 + Q 1 )/2 (70+ 60)/2 65 .1538 E D = ————— = —————— = —— = ——— = .38 P 2 – P 1 2– 3 1 .4000 (P 2 + P 1 )/2 (2 + 3)/2 2.5 FOR REVIEW ONLY - NOT FOR DISTRIBUTION 17 - 3 Elasticity

Example 4F: What is price elasticity of demand if price changes from $2 to $1? Q 2 – Q 1 80– 70 10 (Q 2 + Q 1 )/2 (80+ 70)/2 75 .1333 E D = ————— = —————— = —— = ——— = .20 P 2 – P 1 1– 2 1 .6667 (P 2 + P 1 )/2 (1 + 2)/2 1.5 Price Elasticity of Demand Classifications If E D is greater than one, demand is elastic. If E D is less than one, demand is inelastic. If E D equals one, demand is unitary elastic. Price Elasticity of Demand and Total Revenue One of the uses of price elasticity of demand information is to predict how a change in price will affect total revenue. Total Revenue = Price x Quantity If demand is elastic (E D > 1), price and total revenue are inversely related. An increase in price will cause a decrease in total revenue, and a decrease in price will cause an increase in total revenue. If demand is inelastic (E D < 1), price and total revenue are directly related. An increase in price will cause an increase in total revenue, and a decrease in price will cause a decrease in total revenue. If demand is unitary elastic (E D = 1), a change in price does not change total revenue. The table below, based on Examples 4A – 4F, illustrates the relationship between price elasticity of demand and total revenue. Notice that when demand is elastic, a decrease in price causes an increase in total revenue, when demand is inelastic, a decrease in price causes a decrease in total revenue, and when demand is unitary elastic, a decrease in price does not change total revenue. Change in E D from Price Quantity Total Revenue Total Revenue previous price $7 20 $140 X X 6 30 180 $40 2.60 5 40 200 20 1.57 4 50 200 0 1.00 3 60 180 -20 .64 2 70 140 -40 .38 1 80 80 -60 .20 Determinants of Price Elasticity of Demand The determinants of price elasticity of demand are the factors that determine whether the demand for a good is elastic or inelastic. The four determinants of price elasticity of demand are: FOR REVIEW ONLY - NOT FOR DISTRIBUTION 1. The number of substitutes for the good. The more substitutes for a good, the more elastic the demand for the good. The fewer substitutes for a good, the less elastic the demand for the good. Elasticity 17 - 4

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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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    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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    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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    Chapter 26 Interest, Present Value,

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    An increase in expected rates of re

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    An asset is valuable because we exp

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    Example 13B: General Ordnance prove

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    Appendix: Present Value Table One f

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    ___ 4. An increase in expected rate

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    Problems: 1. List and explain the t

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    Chapter 27 Market Failure The basic

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    External Benefit If a market genera

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    Example 2: To encourage the consump

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    $100 - 90 - 80 - MSC 70 - $ 60 - 50

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    A common good is nonexcludable. Non

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    Study Guide for Chapter 27 Chapter

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    ___ 5. What government policy would

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    4. Based on the information on the

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    Chapter 28 Public Choice and Govern

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    Candidates and the Median Voter Mod

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    Example 8: According to State and F

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    Example 10: When Elvis Presley was

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    4. Pessimistic bias. This is the te

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    ___ 5. An elected official will: a.

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    2. If a certain policy will yield s

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    Chapter 29 Government Regulation of

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    underproduction is the amount that

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    micromanagement results in business

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    market. They may agree with their c

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    Questions for Chapter 29 Fill-in-th

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    ___ 10. The public interest theory

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    4. List the four types of costs imp

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    Chapter 30 Agriculture and Health C

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    weather may cause bumper crops. Bad

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    Security and Rural Investment Act o

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    Example 12: From 1960 to 2013, the

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    1. NHI would provide universal heal

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    d. Insurance providers are not allo

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    Study Guide for Chapter 30 Chapter

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    Answer questions 7. through 10. by

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    ___ 21. If there were no individual

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    Chapter 31 Income Distribution and

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    Income is more equally distributed

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    over a typical career is the accumu

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    Ideal Income Redistribution The ide

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    Poverty - a family whose income fal

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    Appendix: Income Inequality around

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    How is this story an analogy for th

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    ___ 2. In 2013, the Lowest Income 6

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    Problems: 1. Explain the two primar

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    Absolute advantage - when one natio

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    Fiat money - money by government de

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    Nonrivalrous good - a good for whic

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    Absolute advantage, 16-9 Absolute e

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    “Company town”, 25-6 Comparativ

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    Eli Lilly and Company, 22-1 Emergen

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    Houston, Texas, 15-10 Human capital

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    Market, 3-1, 3-8-9 Market basket, 4

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    Political bias, 9-4, 12-7 Political

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    Short run production, 20-2-3 Short-

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    Upturns, 9-4 USDA, 27-9, 30-1-2, 30

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