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Poverty – a family

Poverty – a family whose income falls below a minimum necessary for an adequate standard of living is classified as living in poverty. The amount of income necessary for an adequate standard of living varies by household size. For 2013, the poverty line for a family of four was about $23,800, and the poverty line for a family of three was about $18,600. Poverty rates vary based on certain characteristics. Poverty rates tend to be higher for minority groups, single parent families, the young, and the poorly educated. The table below illustrates some of these differences. The information is from the U.S. Census Bureau, and is for 2013. Group Percent in Poverty Total Population 14.5% By Race/EthnicGroup White 12.3% Black 27.2% Hispanic 23.5% By Age Under 18 years 19.9% 18 to 64years 13.6% 65 years and over 9.5% ByType of Family Married-couple 5.8% Single-parent; male 15.9% Single-parent; female 30.6% High school dropouts have a poverty rate over 5 times as high as college graduates. Poverty and Economic Mobility As discussed earlier in this chapter, there is significant economic mobility in the U.S. economy. The percentage of Americans living below the poverty line may change little from year to year, but the actual persons who are living in poverty change. Example 16: From 2009 to 2011, 31.6% of the population lived in poverty for a period lasting at least two months. However, only 3.5% of the population lived in poverty during the entire 36 months. (Information is from the Census Bureau.) Four Keys to Achieving Financial Security The U.S. economy is the largest in the world. The standard of living is among the highest in the world. Americans enjoy a relatively large amount of economic freedom and opportunity. Yet, many Americans fail to achieve financial security. Financial security means different things to different people. For a college student, financial security might mean being able to pay one’s bills as they come due. For a person approaching retirement age, financial security might mean having sufficient sources of income (investments, pensions, etc.) to provide a comfortable lifestyle after retirement. Most people would like to achieve financial security, but many do not. There are four keys to achieving financial security: 1. Believe that you can achieve financial security. Achieving financial security may not be easy. A college student, saddled with large student loans and facing additional years of education, may see no path to financial security. But it is possible even for a debt-burdened college student to eventually achieve financial security. Any person who enjoys reasonably good health and takes the necessary steps to achieve financial security can eventually FOR REVIEW ONLY - NOT FOR DISTRIBUTION 31 - 9 Income Distribution and Redistribution

achieve financial security. However, if a person believes that it is impossible to achieve financial security, that person will not take the steps necessary to achieve financial security. 2. Invest in your human capital. Investing in human capital is a way to increase one’s earning power. Investing in human capital pays an even higher return today than it did in the past. Example 17: In 1974 male college graduates earned 27% more than male high school graduates. In 2014, male college graduates earned 87% more than male high school graduates. It is possible to achieve financial security with a low level of income. But it is much easier (and more pleasant) to achieve financial security from a higher level of income. 3. Make good personal choices. No one sets out to make bad personal choices. But people often do make choices that hinder their attempts to achieve financial security. Good personal choices are particularly crucial in three areas: a. Health. Maintaining good health is essential to achieving financial security. Health problems not only lower a person’s quality of life, but also reduce income earning potential. Most workers reach their peak earnings and their peak savings rate relatively late in their careers. Poor health may prematurely end a career before financial security can be achieved. b. Marriage. A successful marriage is advantageous to achieving financial security. An unsuccessful marriage can be a severe hindrance to achieving financial security. Marrying wisely, with a commitment to having a successful marriage, is a big step toward achieving financial security. c. Self-control. Many high income persons have ended up in bankruptcy court because of a failure to exercise self-control in spending. Whatever a person’s income level, one must be able to live within that income in order to achieve financial security. 4. Get on the good side of compound interest. Compound interest refers to interest paid on interest. Compound interest is the saver’s best friend and the borrower’s worst enemy, as illustrated in the examples below: Example 18A: Starting at age 23, Saver puts $100 per month into a 401(k) savings plan. (The earnings on a 401(k) savings plan are not taxed until the earnings are withdrawn, usually at retirement.) Saver’s contributions earn a 10% annual return. (The S&P 500 earned an average annual rate of return of about 10% from 1964 through 2013.) At age 67, Saver will have contributed a total of $52,800. Saver’s investment will be worth $824,973 (over 15 times the amount of Saver’s contributions), and Saver will be earning investment income of over $6,800 per month. Example 18B: Length of time is crucial to the power of compound interest. Starting at age 45, Saver puts $200 per month into a 401(k) savings plan. Saver’s contributions earn a 10% annual return. At age 67, Saver will have contributed a total of $52,800. Saver’s investment will be worth $180,514 (about 3.4 times the amount of Saver’s contributions). Example 18C: Rate of return is also crucial to the power of compound interest. Starting at age 23, Saver puts $100 per month into a 401(k) savings plan. Saver’s contributions earn a 5% annual return. At age 67, Saver will have contributed a total of $52,800. Saver’s investment will be worth $186,247 (about 3.5 times the amount of Saver’s contributions). Example 19: Compound interest is also powerful at building debt. Starting at age 23, Borrower borrows $100 per month on a credit card that does not require a minimum payment. Borrower’s interest rate is 12%. At age 67, Borrower will have borrowed a total of $52,800. Borrower’s debt will total $1,547,060 (over 29 times the amount that Borrower has borrowed) and Borrower will be incurring interest on the debt of almost $15,500 per month. FOR REVIEW ONLY - NOT FOR DISTRIBUTION Income Distribution and Redistribution 31 - 10

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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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    4. Based on the information on the

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    Chapter 28 Public Choice and Govern

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    Candidates and the Median Voter Mod

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  • 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
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  • Page 476 and 477: market. They may agree with their c
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  • Page 480 and 481: ___ 10. The public interest theory
  • Page 482 and 483: 4. List the four types of costs imp
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  • Page 486 and 487: weather may cause bumper crops. Bad
  • Page 488 and 489: Security and Rural Investment Act o
  • Page 490 and 491: Example 12: From 1960 to 2013, the
  • Page 492 and 493: 1. NHI would provide universal heal
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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 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 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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