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Since producers will

Since producers will attempt to equalize the ratio of MPP to factor price for all factors, the price of a factor will depend on the factor’s productivity. If Factor B is twice as productive as Factor A, Factor B will have a price twice as high as factor A. Elasticity of Demand for Labor The elasticity of demand for labor measures the responsiveness of employers to a change in the wage rate. The elasticity of demand for labor is the percentage change in the quantity demanded of labor divided by the percentage change in the wage rate. There are three determinants of the elasticity of demand for labor: 1. The number of substitute factors. The more substitute factors for labor, the more elastic the demand for labor. The fewer substitute factors for labor, the less elastic the demand for labor. Example 9A: The donut makers at Darla’s Delectable Donuts ask for a 10% raise. If Darla can readily replace these workers with equally skilled donut makers, she is unlikely to grant the raise. With many substitute factors available, Darla’s demand for donut makers will be elastic. Example 9B: The rocket scientists at Roger’s Rockets ask for a 10% raise. If Roger can not readily replace these rocket scientists with equally skilled rocket scientists, he is likely to grant the raise. With few substitute factors available, Roger’s demand for rocket scientists will be inelastic. 2. The price elasticity of demand for the product that the labor produces. The more elastic the demand for the product, the more elastic the demand for the labor that produces the product. The less elastic the demand for the product, the less elastic the demand for the labor that produces the product. Example 10A: Darla’s Delectable Donuts faces competition from numerous other donut shops. The demand for Darla’s donuts is highly elastic. As a result, Darla’s demand for donut makers is highly elastic. Example 10B: Roger’s Rockets faces little competition in the rocket market. The demand for Roger’s rockets is highly inelastic. As a result, Roger’s demand for rocket scientists is highly inelastic. 3. The percentage that labor costs make up of total costs. The higher the percentage that labor costs make up of total costs, the more elastic the demand for labor. The lower the percentage that labor costs make up of total costs, the less elastic the demand for labor. Example 11A: Labor costs make up 80% of total costs at Farah’s Fashionable Hairstyles. A 10% raise for Farah’s stylists would mean a large increase in Farah’s total costs. As a result, Farah’s demand for stylists is highly elastic. Example 11B: Labor costs make up 15% of total costs at Roger’s Rockets. A 10% raise for Roger’s rocket scientists would mean a small increase in Roger’s total costs. As a result, Roger’s demand for rocket scientists is highly inelastic. Labor Supply Curve for a Perfectly Competitive Employer The labor supply curve shows the quantity of labor supplied at different wage rates. A perfectly competitive labor employer is a small employer in a large labor market. A perfectly competitive labor employer has no market power (no ability to affect the market wage rate). For a perfectly competitive labor employer, the labor supply curve will be horizontal (perfectly elastic) at the market wage rate. Wage and marginal factor cost are the same. FOR REVIEW ONLY - NOT FOR DISTRIBUTION 24 - 5 Factor Markets

Example 12: Khalid’s Kwik Shop, located in Fort Worth, employs 160 to 240 hours of convenience store clerk labor each week. The total quantity of this type of labor employed in Fort Worth is about 60,000 hours per week. Khalid’s hiring decision will not affect the market wage rate for convenience store clerk labor. Khalid’s marginal factor cost will be the same as the market wage rate. Labor Supply Curve in a Particular Labor Market The labor supply curve in a particular labor market will be upward sloping. The quantity of labor supplied in the market will increase as the wage rate increases, and will decrease as the wage rate decreases. Changes in the wage rate change the quantity supplied of labor (a movement along the labor supply curve) but do not cause a change in labor supply (a shift of the labor supply curve). Example 13: If convenience stores in Fort Worth want to employ 20 percent more convenience store clerk labor, the wage rate will have to increase in order to attract a greater quantity supplied of this type of labor. Determinants of Labor Supply If the labor supply curve shifts to the right (increase) or to the left (decrease), this is a change in labor supply. Factors that cause the labor supply curve to shift are the determinants of labor supply: 1. Wage rates in alternative labor markets. An increase in wage rates in alternative labor markets will cause a decrease in labor supply in the particular labor market being examined. A decrease in wage rates in alternative labor markets will cause an increase in labor supply in the particular labor market being examined. Example 14: If the state of Maine increases salaries for its public school teachers, the supply of public school teachers in New Hampshire will decrease (as some New Hampshire teachers move to the Maine market). 2. Nonmoney aspects of a job. Workers prefer pleasant working conditions rather than unpleasant working conditions. If a job becomes more pleasant (e.g. safer, cleaner, less stressful, etc.), the supply of labor in that labor market will increase. If a job becomes more unpleasant (e.g. more dangerous, dirtier, more stressful, etc.), the supply of labor in that labor market will decrease. Example 15: If medical researchers discover that prolonged exposure to chemical cleansers causes janitors to have a high rate of cancer, the supply of persons willing to work as janitors will decrease. Differences in Wage Rates Wage rates in different labor markets differ. The average major league baseball player may earn 70 times more than the average public school teacher. A heart surgeon will earn much more than a tree surgeon. Why are there differences in wage rates? Five factors cause wage rates in different labor markets to differ: 1. Differences in workers’ MRP. The more MRP a worker can generate, the greater the demand for that worker’s labor. FOR REVIEW ONLY - NOT FOR DISTRIBUTION Example 16: The head football coach at State University may generate millions of dollars in revenue for the university, and will be paid accordingly. The head football coach at Local High School will generate much less revenue, and will be paid accordingly. Factor Markets 24 - 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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    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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  • Page 394 and 395: Chapter 24 Factor Markets The basic
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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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