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Income is more equally

Income is more equally distributed after taking taxes and in-kind transfer payments into account. Higher income households pay a higher percentage of income in taxes. In-kind transfer payments are received disproportionately by lower income households. Example 4: After taking federal taxes and in-kind transfer payments into account, the Highest Income 20% of households have about 8 times the income share of the Lowest Income 20%, according to the Congressional Budget Office. The second way that the distribution of money income overstates the degree of income inequality is by focusing on income distribution at a point in time (e.g. 2013) rather than over the course of a lifetime. Income is distributed more equally over the course of a lifetime than at a point in time. Many people in the Lowest Income 20% of households are young people at the start of their careers. Most of these young people will move into higher Income Groups as their careers progress and they develop more human capital. Example 5: In 2012, only 47.3% of households in the Lowest Income 20% were headed by a person from 35-64 years of age. 79.5% of households in the Highest Income 20% were headed by a person 35-64 years of age. If career incomes were compared or if incomes were compared for households at the same career stage (e.g. compare 30-year-olds to 30-year-olds, 50-year-olds to 50-year-olds, etc.), the gap between the highest and lowest Income Groups would be much smaller. Distribution of Wealth In one way, the distribution of money income understates the inequality problem. The terms “rich” and “poor” refer to wealth distribution rather than to income distribution. The distribution of wealth is much more unequal than the distribution of income. Example 6: In 2010, the top 20% of wealth holders had roughly 89% of total wealth. The bottom 20% of wealth holders had roughly 0% of total wealth. The greater inequality in the distribution of wealth has two primary causes: 1. Differences in savings rates. High-income households typically have much higher savings rates than low-income households. Example 7: The table below represents income, savings rate, and wealth for Max, a high-income person, and Minnie, a low-income person. The higher savings rate for Max means that there is a bigger gap in wealth accumulation between Max and Minnie than the gap in income. Max has 16 times as much income as Minnie, but 80 times as much wealth. Max Minnie Income $160,000 $10,000 Savings Rate 10% 2% Wealth Accumulation $16,000 $200 2. Wealth distribution is measured at a point in time. Wealth, like income, is distributed more equally over the course of a lifetime than at a point in time. Example 8: In 2011, households headed by a person 65 to 69 years of age had a median household net worth 29 times greater than households headed by a person under 35 years of age. If wealth were compared for households at the same career stage (e.g. compare 35-yearolds to 35-year-olds, compare 65-year-olds to 65-year-olds, etc.), the gap between rich and poor would be much smaller. FOR REVIEW ONLY - NOT FOR DISTRIBUTION 31 - 3 Income Distribution and Redistribution

Overstating the Inequality of Wealth Distribution The inequality of wealth distribution is overstated in two ways. First, the distribution of wealth is measured at a point in time just like the distribution of income. Thus, wealth distribution compares persons at different career stages. Comparing the wealth of 65-year-olds to the wealth of 35-yearolds overstates the inequality of wealth distribution. The second way that the inequality of wealth distribution is overstated is that the value of human capital is not included in measuring wealth. For most people, human capital is by far the most valuable asset owned. According to economist Gary Becker, human capital makes up 75% of the wealth in a modern economy. Example 9: A 25-year-old recent graduate of Harvard Law School may have very little wealth in terms of physical assets. But a Harvard Law School degree is very valuable human capital. A 65- year-old retiree may have a large accumulation of physical assets, but their human capital is not going to be generating any further income. Causes of Continuing Income Inequality There is a large degree of economic mobility in the U.S. economy. Many people who start out with a low income level eventually reach much higher income levels. Most people prefer higher income to lower income. If most people are striving for higher income, why don’t all people eventually achieve equal income? Why is there continuing income inequality? There are six causes of continuing income inequality: 1. Natural ability. People differ in their natural abilities. Some people are born with a high level of natural ability in an area such as mathematics, or music, or athletics. A person with a high level of a marketable natural ability may earn higher income than a person with a lower level of that natural ability. 2. Human capital. People differ in their development of human capital. Human capital is developed ability that increases a person’s productivity. Human capital is developed primarily through education and training and through work experience. Not all education and training provides the same value of human capital. A degree in chemical engineering may increase a student’s earning power more than a degree in elementary education. Also, a person with more natural ability will gain more human capital from a course of education or training than a person with less natural ability. Still, earnings increase as the education level increases. Example 10: In 2012, 12.9% of households in the Lowest Income 20% included a person with at least a bachelor’s degree. 77.2% of households in the Highest Income 20% included a person with at least a bachelor’s degree. The table below shows the median weekly earnings for full-time workers with different education levels in 2013. The information is provided by the Bureau of Labor Statistics. Median Weekly Earnings by Education Level for Full-time Workers Age 25-64 in 2013 Not a high school graduate $472 High school graduate $651 Some college or Associate’s degree $748 Bachelor’s degree $1,108 Advanced degree $1,389 FOR REVIEW ONLY - NOT FOR DISTRIBUTION Work experience is another source of human capital. Not all work experience provides the same value of human capital. Fifteen years of experience as an attorney will likely increase a person’s earning power more than fifteen years of experience as a truck driver. Still, median earnings increase over the average worker’s career. The main reason that earnings increase Income Distribution and Redistribution 31 - 4

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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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    Chapter 26 Interest, Present Value,

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    An increase in expected rates of re

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    An asset is valuable because we exp

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    Example 13B: General Ordnance prove

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    Appendix: Present Value Table One f

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    ___ 4. An increase in expected rate

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    Problems: 1. List and explain the t

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    Chapter 27 Market Failure The basic

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    External Benefit If a market genera

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    Example 2: To encourage the consump

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

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    A common good is nonexcludable. Non

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    Study Guide for Chapter 27 Chapter

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    ___ 5. What government policy would

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  • Page 514 and 515: How is this story an analogy for th
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  • Page 518 and 519: Problems: 1. Explain the two primar
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  • Page 534 and 535: Market, 3-1, 3-8-9 Market basket, 4
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