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Example 6C: This example

Example 6C: This example builds on Example 6B. The table below adds information for Average Variable Cost (AVC), Average Total Cost (ATC), Total Revenue (TR), Total Cost (TC), and Economic Profit. Profit is equal to Total Revenue minus Total Cost. Fixed cost is assumed to be \$12. Price Quantity MR MC AVC ATC TR TC Profit \$10 0 X X X X \$0 \$12 \$-12 10 1 \$10 \$5 \$5.00 \$17.00 10 17 -7 10 2 10 6 5.50 11.50 20 23 -3 10 3 10 7 6.00 10.00 30 30 0 10 4 10 8 6.50 9.50 40 38 2 10 5 10 9 7.00 9.40 50 47 3 10 6 10 10 7.50 9.50 60 57 3 10 7 10 11 8.00 9.71 70 68 2 10 8 10 12 8.50 10.00 80 80 0 10 9 10 13 9.00 10.33 90 93 -3 Since price is above Average Total Cost for some quantities of output, Percomp Company will be able to earn an economic profit. At the profit-maximizing quantity of six units, the price is \$10, the Average Total Cost is \$9.50, and the economic profit is \$3. Note that maximum profit occurs where Marginal Revenue equals Marginal Cost (6 units). Also, note that since fixed cost is \$12, the profit at zero output is \$-12. A graph illustrating the economic profit is included in an appendix at the end of this chapter. Example 6D: Same as Example 6C, but price falls to \$8. Price Quantity MR MC AVC ATC TR TC Profit \$8 0 X X X X \$0 \$12 \$-12 8 1 \$8 \$5 \$5.00 \$17.00 8 17 -9 8 2 8 6 5.50 11.50 16 23 -7 8 3 8 7 6.00 10.00 24 30 -6 8 4 8 8 6.50 9.50 32 38 -6 8 5 8 9 7.00 9.40 40 47 -7 8 6 8 10 7.50 9.50 48 57 -9 8 7 8 11 8.00 9.71 56 68 -12 8 8 8 12 8.50 10.00 64 80 -16 8 9 8 13 9.00 10.33 72 93 -19 Since price is below Average Total Cost for every quantity of output, Percomp Company will incur an economic loss whatever quantity of output it produces. Should Percomp Company shut down? Since price is above Average Variable Cost for some quantities of output, Percomp can minimize its loss by producing the quantity of output where Marginal Revenue equals Marginal Cost (4 units). This quantity of output results in a loss of \$6. If Percomp shuts down and produces zero units, it incurs a loss of \$12. A graph illustrating the economic loss is included in an appendix at the end of this chapter. FOR REVIEW ONLY - NOT FOR DISTRIBUTION 21 - 5 Perfect Competition

Example 6E: Same as Example 6C, but price falls to \$4. Price Quantity MR MC AVC ATC TR TC Profit \$4 0 X X X X \$0 \$12 \$-12 4 1 \$4 \$5 \$5.00 \$17.00 4 17 -13 4 2 4 6 5.50 11.50 8 23 -15 4 3 4 7 6.00 10.00 12 30 -18 4 4 4 8 6.50 9.50 16 38 -22 4 5 4 9 7.00 9.40 20 47 -27 4 6 4 10 7.50 9.50 24 57 -33 4 7 4 11 8.00 9.71 28 68 -40 4 8 4 12 8.50 10.00 32 80 -48 4 9 4 13 9.00 10.33 36 93 -57 Since price is below ATC for every quantity of output, Percomp Company will incur an economic loss whatever quantity of output it produces. Should Percomp Company shut down? Since price is also below Average Variable Cost for every quantity of output, Percomp can minimize its loss by producing zero units (shutting down). Thus, the shutdown point occurs if price falls below Average Variable Cost. By shutting down, the firm limits its loss to its fixed costs (\$12). If the firm produces, it will incur a loss greater than its fixed costs. The Supply Curve for a Perfect Competitor A supply curve indicates the quantity supplied at different prices. We have seen in Examples 6C, 6D, and 6E that a perfect competitor will produce the quantity of output where price equals marginal cost, as long as the price is greater than average variable cost. If the price falls below AVC, the perfect competitor will shut down. Thus, the supply curve for a perfect competitor is the portion of the firm’s marginal cost curve that lies above the shutdown point. Perfect Competition in the Long Run In a perfectly competitive market, will the price be high enough that firms earn economic profits? Or will the price be so low that firms suffer economic losses? Either of these situations may occur in the short run. But in the long run, either economic profits or losses will be eliminated, and price will equal minimum Average Total Cost. To see how economic profits or losses are eliminated in the long run, we will refer back to previous examples. In Example 6C, the market price was \$10 and Percomp Company (along with the other firms in the market) was earning economic profit. If economic profits are available in a perfectly competitive market, new firms will be attracted to the market. Remember that perfect competition is characterized by freedom of entry and exit. As new firms enter the market, the market supply increases, and the market price decreases. As long as the market price is above Average Total Cost for some quantities of output, economic profits will be earned, new firms will continue to enter the market, and the market price will continue to decrease. What if market price is below Average Total Cost for all quantities of output (as in Example 6D)? If price is below Average Total Cost for all quantities of output, Percomp Company (along with the other firms in the market) will suffer economic loss. If economic losses are occurring in a perfectly competitive market, existing firms will be motivated to leave the market. As existing firms exit the market, the market supply decreases, and the market price increases. As long as the market price is below Average Total Cost for all quantities of output, economic losses will occur, existing firms will continue to exit the market, and the market price will continue to increase. FOR REVIEW ONLY - NOT FOR DISTRIBUTION Perfect Competition 21 - 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 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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• Page 386 and 387: Example 12 illustrates the dilemma
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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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