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## Chapter 31 Income

Chapter 31 Income Distribution and Redistribution The basic economic problem is scarcity. Human wants are unlimited. Resources are limited. The basic goal in dealing with the problem of scarcity is to produce as much consumer satisfaction as possible with the limited resources available. Two elements are necessary to achieve this goal: 1. Producing the greatest quantity possible of the combination of goods that provides the greatest consumer satisfaction. 2. Achieving the distribution of income that will yield the greatest total utility for society. A market economy is ideal for accomplishing the first element. But the unequal distribution of income in a market economy will probably not yield the greatest total utility for society. This chapter examines income distribution and redistribution. Some Income Distribution Facts Ask the average person what U.S. GDP is, and they are unlikely to know with any precision. Ask the same person what their own income is, and they are likely to know very precisely. Most people are less concerned about National Income than they are about their own income. Most people care less about the size of the whole economic pie than about the size of their slice. In a market economy, income is distributed based on the productivity of resources. The resources owned by different households are not all of the same productivity. So the income distribution is unequal. But just how unequal is income distribution in the U.S.? The table below shows the share of total money income received by different groups of households, ranging from the Lowest Income 20% of households to the Highest Income 20% of households, for the year 2013. The table also shows the income range for each Household Income Group. The information is from the U.S. Census Bureau. Household Percentage of Income Group Total Money Income Income Range Lowest 20% 3.2% \$0 – 20,900 Second 20% 8.4% \$20,901 – 40,187 Third 20% 14.4% \$40,188 – 65,501 Fourth 20% 23.0% \$65,502 – 105,910 Highest 20% 51.0% \$105,911 and up The table above shows that the Highest Income 20% of households have almost 16 times the share of total money income as the Lowest Income 20% of households. (51.0 ÷ 3.2 = 15.9) Economic Mobility There is significant economic mobility in the U.S. economy. We should not assume that the Household Income Groups consist of the same households over time. Over a typical ten year period, fewer than half of the households in the Lowest Income 20% will remain in that Group. Most will move up to one of the four higher Income Groups. Example 1: Research by Mark Rank and Thomas Hirschl found that 73% of Americans between the ages of 25 and 60 will spend at least one year in the Highest 20% Household Income Group and 12% will spend at least one year in the top 1% of income earners. Research by Raj Chetty, et al. indicates that intergenerational income mobility has remained steady in recent decades. FOR REVIEW ONLY - NOT FOR DISTRIBUTION The Lorenz Curve The degree of income inequality can be expressed with a Lorenz curve. A Lorenz curve contrasts the actual distribution of income with perfect equality. 31 - 1 Income Distribution and Redistribution

The graph below shows the actual distribution of money income for 2013 and the line of perfect equality. If income was distributed with perfect equality, 20% of the households would have 20% of the income, 40% of the households would have 40% of the income, etc. In actuality, the Lowest Income 20% of households have 3.2% of total money income, the Lowest Income 40% of households have 11.6% of total money income, etc. The gap between the line of perfect equality and the actual distribution curve indicates the degree of income inequality. % of Income 100% - 80% - 60% - 40% - 20% - Perfect Equality 0% 0% 20% 40% 60% 80% 100% % of Households Degree of Inequality Actual Distribution The distribution of income has been growing more unequal in recent decades. Example 2: In 1971, the Highest Income 20% of households had only about 11 times the share of total money income as the Lowest Income 20% of households (43.5% versus 4.1%). Some argue that the increase in income inequality in recent decades was due largely to increased immigration. Example 3: Between 1970 and 2013, the foreign-born population in the U.S. increased from 9.6 million to 41 million. The percentage of the U.S. population that is foreign-born increased from 4.7% in 1970 to 13.1% in 2013. Immigrants have a median annual income over 12% lower than native-born Americans. Thus, the increased number of immigrants reduces the median income of the Lower Income Groups and widens the gap between the Highest and Lowest Income Groups. Overstating the Degree of Income Inequality The distribution of money income overstates the degree of income inequality in two ways. First, the distribution of money income does not take into account the effect of taxes paid or of in-kind transfer payments received. Money transfer payments (e.g. unemployment compensation, social security benefits) are included in money income. In-kind transfer payments (e.g. Medicare, Medicaid, the Supplemental Nutrition Assistance Program) are not included in money income. FOR REVIEW ONLY - NOT FOR DISTRIBUTION Income Distribution and Redistribution 31 - 2

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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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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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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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Chapter 24 Factor Markets The basic

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\$ \$240 - 200 - 160 - 120 - 80 - 40

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Since producers will attempt to equ

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2. Differences in nonmoney aspects

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were his strikeouts, walks, and hom

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___ 3. To maximize profits, a produ

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___ 19. According to the book, “M

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Multiple Choice: 1. a. 8. c. 15. d.

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Chapter 25 Labor Unions The primary

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The elasticity of demand for union

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Example 4A: Assume that the graph b

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Notice from the graph in Example 6

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Wage Factory A Quantity of Labor S

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As a cartel, a labor union faces a

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___ 10. For a monopsony: a. there i

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3. The graph below represents a lab

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Chapter 26 Interest, Present Value,

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An increase in expected rates of re

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An asset is valuable because we exp

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Example 13B: General Ordnance prove

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Appendix: Present Value Table One f

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___ 4. An increase in expected rate

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Problems: 1. List and explain the t

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Chapter 27 Market Failure The basic

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External Benefit If a market genera

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Example 2: To encourage the consump

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\$100 - 90 - 80 - MSC 70 - \$ 60 - 50

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A common good is nonexcludable. Non

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Study Guide for Chapter 27 Chapter

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• Page 468 and 469: 2. If a certain policy will yield s
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• Page 472 and 473: underproduction is the amount that
• Page 474 and 475: micromanagement results in business
• Page 476 and 477: market. They may agree with their c
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• Page 480 and 481: ___ 10. The public interest theory
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• Page 496 and 497: Study Guide for Chapter 30 Chapter
• Page 498 and 499: Answer questions 7. through 10. by
• Page 500 and 501: ___ 21. If there were no individual
• 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
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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
• Page 518 and 519: Problems: 1. Explain the two primar
• Page 520 and 521: Absolute advantage - when one natio
• Page 522 and 523: Fiat money - money by government de
• Page 524 and 525: Nonrivalrous good - a good for whic
• Page 526 and 527: Absolute advantage, 16-9 Absolute e
• Page 528 and 529: “Company town”, 25-6 Comparativ
• Page 530 and 531: Eli Lilly and Company, 22-1 Emergen
• Page 532 and 533: Houston, Texas, 15-10 Human capital
• Page 534 and 535: Market, 3-1, 3-8-9 Market basket, 4
• Page 536 and 537: Political bias, 9-4, 12-7 Political
• Page 538 and 539: Short run production, 20-2-3 Short-
• Page 540 and 541: Upturns, 9-4 USDA, 27-9, 30-1-2, 30
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