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variable cost initially decreases, for the same reason that marginal cost initially decreases. But with the third birdhouse the law of diminishing marginal returns sets in and the marginal cost begins to increase. The increase in marginal cost means that the average variable cost also increases. The average total cost is the sum of the average fixed cost and the average variable cost. The average total cost initially decreases, mainly due to the rapid decrease in average fixed cost. Eventually, the effect of diminishing marginal returns causes average variable cost to increase more rapidly than average fixed cost is decreasing. This causes average total cost to increase from the fifth unit onward. The marginal cost, average fixed cost, average variable cost, and average total cost curves are illustrated on the graph below. Notice from the graph that the marginal cost curve eventually slopes upward (from unit two onward). This is because, as discussed earlier, diminishing marginal returns causes increasing marginal cost. Also, notice that the marginal cost curve intersects the ATC curve and the AVC curve at their minimum points. This will always be the case. Marginal cost is the change in total cost (and variable cost) that results from producing an additional unit of output. If the marginal cost of the additional output is less than the ATC (or the AVC), the ATC (or the AVC) will decrease. If the marginal cost is greater than the ATC (or the AVC), the ATC (or the AVC) will increase. \$170 - 160 - MC 150 - 140 - 130 - 120 - 110 - 100 - Costs 90 - 80 - 70 - 60 - 50 - 40 - 30 - 20 - 10 - 0 0 1 2 3 4 5 6 7 8 Quantity of Birdhouses FOR REVIEW ONLY - NOT FOR DISTRIBUTION ATC AVC AFC 20 - 5 Production and Costs

Appendix: Completing a Cost Table Two of the problems in the study guide portion of this chapter require the student to complete a cost table. The purpose of such an exercise is to help the student better grasp how the different costs are calculated and how they relate to each other. The steps to completing a cost table will be illustrated in Example 7 below: Example 7: The cost table below contains partial information. The table can be completed if the student understands how the different costs are calculated and how they relate to each other. Quantity TC MC AFC AVC ATC 0 240 X X X X 1 ____ 60 ____ ____ ____ 2 ____ ____ 120 ____ 190 3 480 ____ ____ ____ ____ 4 ____ ____ ____ 90 ____ 5 ____ 140 ____ ____ ____ 6 ____ ____ ____ ____ 150 The first step to completing a cost table is to determine the fixed cost. For the cost table above, the fixed cost can be determined in one of two ways: 1. The total cost at a quantity of zero is the fixed cost. Any cost incurred at zero output must be fixed cost, since variable costs can be avoided by not producing. Thus, the fixed cost on this table is 240. 2. The AFC for two units is given as 120. The formula for computing AFC (AFC = FC ÷ Q) can be adjusted to solve for FC. The formula would now be FC = AFC x Q. Thus, FC = 120 x 2 = 240. Once the fixed cost is determined, the average fixed cost for the different quantities can be calculated using the formula AFC = FC ÷ Q. Thus, AFC for a quantity of one is 240 ÷ 1 = 240. AFC for a quantity of two is 240 ÷ 2 = 120. AFC for a quantity of three is 240 ÷ 3 = 80, etc. The table below is updated for the newly calculated AFC numbers. Quantity TC MC AFC AVC ATC 0 240 X X X X 1 ____ 60 240 ____ ____ 2 ____ ____ 120 ____ 190 3 480 ____ 80 ____ ____ 4 ____ ____ 60 90 ____ 5 ____ 140 48 ____ ____ 6 ____ ____ 40 ____ 150 Once AFC has been calculated for each quantity, the table is completed row by row. At a quantity of one, the marginal cost is 60. Marginal cost is the increase in total cost incurred by producing one additional unit. So the TC at a quantity of one is the 240 TC at a quantity of zero plus the 60 MC of the first unit equals 300. Once the TC at a quantity of one is computed, the ATC at a quantity of one can be calculated. ATC = TC ÷ Q or ATC = 300 ÷ 1 = 300. Once the ATC is calculated, AVC can be calculated. AFC + AVC = ATC. If two of the three averages are known, the third average can be solved. In this case AFC = 240 and ATC = 300, therefore, AVC must equal 60. FOR REVIEW ONLY - NOT FOR DISTRIBUTION The table on the next page is updated for the newly calculated costs at a quantity of one. Production and Costs 20 - 6

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PRINCIPLES OF ECONOMICS JEFF HOLT S

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Principles of Economics, 6th Editio

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16. Study Guide for Chapter 7 17. C

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11. Appendix: Book Review - “The

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20. Appendix: The NCAA Cartel 21. S

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Introduction: A Brief History of U.

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In the twentieth century, per capit

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Appendix: The 35 Largest National E

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Multiple Choice: ___ 1. The Jamesto

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2. Describe the economic cost of th

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Chapter 1 Scarcity and Choices The

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Example 5B: At the end of 1982, the

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Example 11: When Cindy quits her jo

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consequences may result in failure

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An upward sloping curve (as in Exam

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In making decisions, humans tend to

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5. ______________________ _________

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___ 13. If the value of one variabl

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Y Point X Y A 0 1 B 3 3 C 6 5 D 9 7

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Chapter 2 Trade and Economic System

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Example 4B: The following quantitie

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1. An increase in the quantity of r

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3. For whom to produce? This is det

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The graph below illustrates the shi

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The two primary economic systems ar

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___ 12. The capitalist vision sees

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___ 25. According to the book “Ca

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Chapter 3 Demand, Supply, and Equil

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. For inferior goods, income and de

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The same information can be placed

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Not only does a free market elimina

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\$7 - 6 - 5 - S 3 S1 S 2 Price 4 - 3

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Example 17: The graph below illustr

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Questions for Chapter 3 Fill-in-the

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___ 12. Assuming a market originall

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\$8 - 7 - 6 - 5 - Price 4 - 3 - 2 -

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Chapter 4 Inflation and Unemploymen

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Computing the Rate of Inflation The

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Full Employment Though unemployment

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3. Cyclical unemployment - due to d

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During the Great Depression, the ec

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Appendix: Think Like an Economist -

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Answer questions 8. and 9. based on

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___ 25. The extension of unemployme

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Chapter 5 Measuring Total Output: G

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5. Leisure. Leisure time is by defi

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The U.S. is a high per capita GDP c

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Example 17: In “An International

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The simple circular flow diagram be

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___ 3. Which of the following would

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2. Explain what nonproduction trans

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Chapter 6 The Aggregate Market The

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Example 2C: Assume the same facts a

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Example 5B: The price of crude oil

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Appendix: Why the Aggregate Demand

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___ 3. DEF Company can invest in ne

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2. List and explain the two factors

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Chapter 7 Classical Economic Theory

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Notice that the investment demand c

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Long-Run Equilibrium If Real GDP is

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Example 6B: When the economy is in

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Laissez-faire If the economy is sel

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___ 5. According to Say’s Law: a.

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3. On the graph below, draw an aggr

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Chapter 8 Keynesian Economic Theory

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Example 2B: The graph below illustr

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Example 5: Assume that the table be

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Notice on the graph on the previous

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According to Keynesian theory, a ch

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“The General Theory” also inclu

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___ 8. If the consumption function

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3. If the MPC is .667, and investme

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Chapter 9 Fiscal Policy The basic e

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Keynesian Fiscal Policy Theory and

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Example 5A: The federal government

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The Laffer Curve What will happen t

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Appendix: The Importance of Incenti

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___ 4. A decrease in government exp

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2. Explain what automatic stabilize

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Chapter 10 Money, Money Creation, a

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Example 4B: The castaways on Gillig

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Looking at the balance sheet below,

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Demand-side One-shot Inflation Exam

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4. Inflation increases uncertainty

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life; it came into existence not by

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calculated by using the potential d

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___ 12. If the required-reserve rat

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4. Referring to the balance sheet f

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Chapter 11 The Federal Reserve Syst

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5. After Bank X sells the \$300,000

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Low Mortgage Interest Rates Mortgag

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Relaxed Standards for Mortgage Loan

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The Bursting of the Housing Bubble

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On February 17, 2009, the federal g

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Fed policies caused short-term inte

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___ 10. The Fed’s most important

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___ 25. In response to the recessio

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Chapter 12 Monetary Policy The basi

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2. A change in aggregate demand (AD

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Monetarist Transmission Mechanism C

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3. Borrowers do not have to seek ou

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Appendix: Book Review - “The Age

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Questions for Chapter 12 Fill-in-th

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___ 16. The primary source of incom

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7. According to Alan Greenspan, wha

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Chapter 13 Taxes, Deficits, and the

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Example 5: In 2015, Taxpayer A had

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of \$5 and a quantity of 10 units. T

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The complexity of the tax law also

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the current government spending and

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cut of 1964. The top rate was lower

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___ 6. Federal excise taxes: a. are

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3. How would eliminating the loopho

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Chapter 14 Economic Growth The basi

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2. Labor. Labor can contribute to e

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An improvement in technology (e.g.

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The table below shows the economic

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will increase both Real GDP and per

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___ 8. Which of the following is co

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___ 26. The opinion that economic g

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Chapter 15 Less Developed Countries

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Example 8: Countries A, B, C, and D

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Obstacles to Economic Development f

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c. Restrictions on international tr

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Appendix: Book Review - “The Powe

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Example 25: In Brazil, about half t

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Study Guide for Chapter 15 Chapter

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___ 13. Among the counterproductive

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4. List four ways that governments

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Other Benefits of Free Internationa

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Example 6: The graph below illustra

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is only 25% as productive as before

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Smith was skeptical of government a

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___ 4. For Country X, what is the o

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___ 18. Frédéric Bastiat’s “P

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

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Chapter 17 Elasticity We are often

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Example 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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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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___ 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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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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“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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