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market. They may agree

market. They may agree with their competitors to fix prices, divide up markets, merge their competing companies, or otherwise reduce the level of competition in the market. Attempts to monopolize or reduce the competition in a market can increase the economic inefficiency in the market. Antitrust law is intended to prohibit attempts to monopolize markets or to engage in anti-competitive behavior. Antitrust law – legislation intended to prohibit attempts to monopolize markets or to engage in anti-competitive behavior. The first federal antitrust legislation was the Sherman Act, enacted in 1890. Section 1 of the Sherman Act prohibits contracts, combinations, and conspiracies in restraint of trade (in other words, prohibits agreements to avoid competition). Section 2 of the Sherman Act prohibits persons from monopolizing, or attempting to monopolize, a market. The Supreme Court has interpreted the Sherman Act as only prohibiting behavior that unreasonably restrains trade. Certain actions are held to always be unreasonable restraints of trade and thus are illegal per se. For instance, a price-fixing agreement between competing firms is a per se violation of Section 1 of the Sherman Act. Example 11: Darla’s Delectable Donuts and Ben’s Bakery agree to increase their prices by 15 percent. This is a price-fixing agreement between competing firms and is a per se violation of the Sherman Act. Other actions are held not to be per se violations of the Sherman Act, and are judged under the “rule of reason”. For instance, a vertical restraint on distribution is an agreement between a producer and a distributor that the distributor will not market the producer’s products outside the distributor’s assigned region. Example 12: Janelle’s Juice Company wants to establish a strong network of distributors to distribute its juice products. Janelle’s requires its distributors to agree that they will not market Janelle’s products outside their assigned regions. This is a vertical restraint on distribution and will be a violation of the Sherman Act only if it unreasonably restrains trade. The Sherman Act was seen by many as being too general to effectively prevent anticompetitive behavior. The Clayton Act, enacted in 1914, prohibits certain specific actions if the effect of the actions is to “substantially lessen competition or tend to create a monopoly”. Section 3 of the Clayton Act restricts tying agreements and exclusive dealing agreements. In a tying agreement, a seller refuses to sell one product to a buyer unless the buyer agrees to buy a second product. In an exclusive dealing agreement, a producer refuses to sell a product to a retailer unless the retailer agrees to deal only in the producer’s product. Section 7 of the Clayton Act restricts mergers. A merger is the combining of two separate companies into one. Mergers are usually accomplished by one company purchasing the common stock or the assets of another company. Whether a proposed merger will be judged to substantially lessen competition or tend to create a monopoly depends largely on the type of merger proposed: 1. Horizontal merger – a merger of firms competing in the same product market. 2. Vertical merger – a merger of firms in the same industry, but not at the same stage in the production process. FOR REVIEW ONLY - NOT FOR DISTRIBUTION 3. Conglomerate merger – a merger of firms that are not in the same industry. 29 - 7 Government Regulation of Business

Example 13: A merger of General Motors and Ford Motor Company would be a horizontal merger. A merger of General Motors and Goodyear Tire and Rubber Company would by a vertical merger. A merger of General Motors and Tonka Toys would be a conglomerate merger. The type of merger that is most likely to be opposed by the federal government is a horizontal merger. Factors that are considered in determining whether a proposed horizontal merger will be opposed include: 1. Is the market already highly concentrated? 2. Will the proposed merger significantly increase the concentration in the market? 3. Is the proposed merger necessary to prevent one of the merging firms from failing? 4. Will the proposed merger allow the new company to compete more effectively with larger firms in the market? 5. Will the proposed merger allow the new company to operate more efficiently? The Federal Trade Commission Act, enacted in 1914, prohibits unfair methods of competition and established the Federal Trade Commission to enforce antitrust laws. Today, the antitrust laws are enforced by the Federal Trade Commission and by the Antitrust Division of the Department of Justice. Also, private parties who suffer damages caused by antitrust violations may sue the violator and recover three times the damages proved. Antitrust law has proven to be controversial. The interpretation and enforcement of antitrust law varies from one presidential administration to the next. The antitrust law can sometimes serve to protect less efficient producers from competition with more efficient producers. Nonetheless, antitrust law is necessary to restrict anti-competitive behavior (price-fixing, cartel agreements, etc.) which would be likely to occur in oligopolistic markets. As Adam Smith wrote in “An Inquiry into the Nature and Causes of the Wealth of Nations”, “People of the same trade seldom meet together…but the conversation ends in a conspiracy against the public, or in some diversion to raise prices.” Study Guide for Chapter 29 Chapter Summary for Chapter 29 Government regulation of business may be aimed at correcting market failure and improving economic efficiency. Natural monopoly is an industry in which economies of scale are so important only one firm can survive. An unregulated natural monopoly would maximize profits by producing the quantity of output where marginal revenue equals marginal cost. The profitmaximizing quantity of output is not the same as the optimal (efficient) quantity of output. The optimal quantity of output occurs where price equals marginal cost. The optimal price would result in the firm suffering an economic loss, and would require a government subsidy to the firm. Natural monopolies are often regulated to earn zero economic profits. Regulating a natural monopoly to earn zero economic profit leads to problems; (1) the natural monopoly lacks incentives to control costs, and (2) the regulators may not be able to obtain accurate information. Three theories of regulation have been developed. The public interest theory holds that regulation serves the public interest. The capture theory holds that the regulatory agency will be captured by the industry being regulated. The public choice theory holds that regulation serves the best interests of the government regulators. FOR REVIEW ONLY - NOT FOR DISTRIBUTION Regulations impose costs on the economy, including; (1) costs of the regulatory agency, (2) costs to the regulated firms of complying with the regulations, (3) inefficiency costs if the regulations reduce competition, and (4) costs of unintended consequences of regulations. Deregulation will usually result in lower prices due to increased competition. Government Regulation of Business 29 - 8

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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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    3. The graph below represents a lab

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  • Page 436 and 437: ___ 4. An increase in expected rate
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  • Page 472 and 473: underproduction is the amount that
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  • Page 478 and 479: Questions for Chapter 29 Fill-in-th
  • 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
  • Page 506 and 507: over a typical career is the accumu
  • Page 508 and 509: Ideal Income Redistribution The ide
  • Page 510 and 511: Poverty - a family whose income fal
  • 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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    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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