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micromanagement results in businesses being subject to an enormous amount of highly detailed government regulation. Example 4: The Federal Register records all of the regulations that the federal government imposes on businesses. The 2013 Federal Register contains almost 80,000 pages. Costs of Regulations Regulations may benefit the general public (e.g. cleaner air and water,) or the regulated industry (e.g. protection from competition) or the regulatory agency (e.g. a bigger agency budget). But regulations also impose costs on the economy: 1. Costs of the regulatory agency. Environmental regulations require an Environmental Protection Agency to enforce them. The EPA has about 16,500 employees. The salaries of those employees, as well as other costs to operate the agency, are paid by the taxpayers. The table below shows the annual budgets for some of the larger federal regulatory agencies for fiscal year 2014. RegulatoryAgency Environmental Protection Agency Securities and Exchange Commission Occupational Safety and Health Administration Federal Motor Carrier Safety Administration Federal Communications Commission Consumer Financial Protection Bureau Mine Safety and Health Administration Equal Employment Opportunity Commission Federal Energy Regulatory Commission Federal Trade Commission Commodity Futures Trading Commission National Labor Relations Board Federal Housing Finance Agency Antitrust Division of the Department of Justice Consumer Product Safety Commission Annual Expenditures $5,338 million 1,696 million 578 million 562 million 517 million 508 million 388 million 372 million 332 million 311 million 303 million 285 million 240 million 159 million 119 million The costs of regulatory agencies have been increasing. According to research by Susan Dudley and Melinda Warren, federal regulatory agency expenditures increased by 163 percent (in constant dollars) between 1990 and 2014. Staffing levels for federal regulatory agencies increased by 86 percent over this time period. 2. Costs to the regulated firms of complying with the regulations. A company may incur costs to install pollution abatement equipment required by the EPA as well as costs to complete paperwork required by the EPA. The company may also incur costs to comply with regulations created by the Occupational Safety and Health Administration, the National Labor Relations Board, the Equal Employment Opportunity Commission, the Federal Trade Commission, etc. The cost of complying with the various regulations adds to the company’s cost of production, and is ultimately paid by the consumers of the company’s products. Example 5: Research by Nicole V. Crain and W. Mark Crain estimated the costs of complying with federal regulations at $1.75 trillion in 2008. These costs fell disproportionately on small businesses (businesses with fewer than 20 employees). FOR REVIEW ONLY - NOT FOR DISTRIBUTION 3. Inefficiency costs if the regulations reduce competition. Regulation often reduces competition in the regulated industry. Competition enhances economic efficiency (see Chapter 21). A lack of competition leads to higher prices for consumers. 29 - 5 Government Regulation of Business

Example 6: After the deregulation of the airline industry in 1978, the increased competition in the airline industry led to lower prices. Research estimated a savings to consumers of $12 billion per year because the deregulation increased competition. 4. Costs of unintended consequences of regulations. Regulations intended to accomplish a desirable goal may have unintended consequences that are undesirable. The regulation of the airline industry from 1938 to 1978 was not intended to increase fatalities from auto accidents, but it did. Example 7: The regulation of the airline industry led to higher prices for air travel. This increased auto travel. Air travel is much safer than auto travel. Deregulation of the airline industry lowered the cost of air travel, leading to more air travel and less auto travel. Research by Richard McKenzie indicated that airline deregulation caused a reduction in auto fatalities of nearly 1,700 per year. Thus, the regulation of the airline industry (from 1938 to 1978) resulted in many thousands of additional fatalities from auto accidents. Deregulation Deregulation will usually result in lower prices due to increased competition. The savings to consumers following airline deregulation was mentioned previously in this chapter. Lower prices also followed deregulation in telecommunications, banking, natural gas, trucking, and railroads. Example 8: The Staggers Rail Act of 1980 deregulated railroad freight operations. According to the Association of American Railroads, real operating costs per ton-mile decreased by 69 percent between 1980 and 2002, and real rail rates decreased by 65 percent over this time period. Example 9: The Motor Carrier Act of 1980 partially deregulated the trucking industry. The Brookings Institution estimated the savings resulting from the increased competition in the trucking industry at $20 billion per year. Deregulation will also eliminate the cost to taxpayers of paying for the regulatory agency and the cost to consumers of paying for the compliance costs of the regulations. However, deregulation can be politically difficult to accomplish. Regulation will benefit someone (if only the regulatory agency). Those who benefit from the regulation will act as a special-interest group to fight against deregulation. Appendix: Antitrust Law We saw in Chapter 21 that perfect competition is the ideal market structure. In Chapters 22 and 23, we saw that monopoly, monopolistic competition, and oligopoly are inefficient. It is not possible for all markets to be perfectly competitive. Economies of scale may require firms to be relatively large in order to operate at the most efficient size. Example 10: The annual market demand for widgets is 100,000 units and the minimum efficient scale of operation is a factory large enough to produce 25,000 widgets per year. To achieve the most efficient size, each firm in the widget market will need to capture 25% of the market. A small number of large firms will be more cost efficient than would a large number of small firms. In the extreme example of economies of scale, natural monopoly, only one firm can survive. As we saw earlier in this chapter, natural monopolies are usually subject to direct government regulation. The regulation is intended to allow the natural monopoly to take advantage of economies of scale, while moving the quantity of production nearer to the optimal quantity. FOR REVIEW ONLY - NOT FOR DISTRIBUTION The degree of economic inefficiency in monopolistic competition and oligopoly tends to be much smaller than in monopoly. But firms in these market structures have an incentive to try to establish cartel agreements with their competitors, or otherwise attempt to monopolize the Government Regulation of Business 29 - 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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    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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  • Page 480 and 481: ___ 10. The public interest theory
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  • Page 486 and 487: weather may cause bumper crops. Bad
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  • Page 498 and 499: Answer questions 7. through 10. by
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  • Page 502 and 503: Chapter 31 Income Distribution and
  • Page 504 and 505: Income is more equally distributed
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  • Page 512 and 513: Appendix: Income Inequality around
  • Page 514 and 515: How is this story an analogy for th
  • Page 516 and 517: ___ 2. In 2013, the Lowest Income 6
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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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