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. For inferior goods,

. For inferior goods, income and demand are inversely related. An increase in income will cause a decrease in demand (demand curve shifts to the left). A decrease in income will cause an increase in demand. Consumers purchase inferior goods because they are affordable even with little income. Ramen noodles (popular among college students) and used clothing are examples of inferior goods. Example 3: The workers at the widget factory across the street from Darla’s Delectable Donuts receive a pay increase. This is good news for Darla. The increase in consumer income will increase the demand for her donuts. But the pay increase is bad news for Sarita, who owns Second-Foot Shoes, next door to Darla’s Delectable Donuts. The increase in consumer income will decrease the demand for used shoes, an inferior good. 2. Preferences. If consumer preference for a good increases, the demand for the good increases (demand curve shifts to the right). If consumer preference for a good decreases, the demand for the good decreases (demand curve shifts to the left). Example 4A: A new diet book introduces “the donut diet” as a tasty way to lose weight. The popularity of the donut diet increases consumer preference for donuts. As a result, the demand for Darla’s donuts increases. Example 4B: A popular horror movie features a gruesome villain (Homer Slashsome) who munches on donuts while dispatching his victims. The stomach-twisting scenes in the movie decrease consumer preference for donuts. As a result, the demand for Darla’s donuts decreases. 3. Prices of related goods (substitutes or complements). The demand for a good is directly related to the price of a substitute. If Good Y is a substitute for Good X, an increase in the price of Good Y will cause an increase in the demand for Good X. The demand for a good is inversely related to the price of a complement. If Good Y is a complement for Good X, an increase in the price of Good Y will cause a decrease in the demand for Good X. Example 5A: Cindy’s Cinnamon Rolls lowers its price by 30 percent. As a result of this decrease in the price of a substitute, the demand for Darla’s donuts decreases. Example 5B: Wholesale coffee prices increase. Darla is forced to increase her price for a cup of coffee by 75 percent. As a result of this increase in the price of a complement, the demand for Darla’s donuts decreases. 4. Number of buyers. An increase in the number of buyers for a good will increase the demand for the good. A decrease in the number of buyers will decrease the demand. Example 6: The widget factory across the street from Darla’s Delectable Donuts increases its workforce by 50 workers. As a result of this increase in the number of buyers, the demand for Darla’s donuts increases. 5. Expectations of future price. If buyers expect the price of a good to rise in the future, the demand for the good now will increase. If buyers expect the price to fall in the future, the demand for the good now will decrease. Example 7A: Darla’s hometown announces that a 25% excise tax will be imposed on unhealthy foods (like donuts) beginning June 1. As a result of the expectation of a higher future price, the demand for Darla’s donuts increases in the last few days of May. FOR REVIEW ONLY - NOT FOR DISTRIBUTION Example 7B: The state of Oklahoma increased the state tax on a package of cigarettes by 55¢, effective January 1, 2005. There were record cigarette sales across the state on December 31, 2004. 3 - 3 Demand, Supply, and Equilibrium

Change in Demand versus Change in Quantity Demanded A change in demand refers to a shift in the demand curve. A change in demand is caused by a change in one of the determinants of demand. A shift to the right is an increase in demand. A shift to the left is a decrease in demand. A change in quantity demanded refers to a movement along the demand curve. A change in quantity demanded is caused by a change in price. An increase in price will cause a decrease in quantity demanded (a movement upward along the demand curve). A decrease in price will cause an increase in quantity demanded (a movement downward along the demand curve). For a detailed explanation of the difference between a movement along a curve versus a shift in a curve, see the appendix at the end of Chapter 2. Supply – the willingness and ability of sellers to sell different quantities of a good at different prices. We are interested in the relationship between the various possible prices of a good and the quantities (amounts) of the good that sellers are willing and able to sell. The relationship between price and quantity supplied is expressed in the law of supply. Law of supply – the price and the quantity supplied of a good are directly related. Remember from Chapter 1 that a direct relationship means that as the value of one variable increases, the value of the other variable also increases. Thus, the law of supply indicates that as the price of a good increases, the quantity supplied of the good also increases. And as the price of a good decreases, the quantity supplied of the good also decreases. The reason for the direct relationship between price and quantity supplied is the seller’s goal of profit-maximization. For the seller to make a profit, the selling price must be sufficient to cover the seller’s cost of production. An increase in the selling price will make it easier for sellers to cover their cost of production. An increase in the selling price will cause existing producers to increase their production and will attract new producers into the market. Thus, an increase in the selling price will cause an increase in the quantity supplied. Example 8: Fifty college students are given an opportunity to earn income by participating in a four-hour product testing on Friday afternoon. If the pay offered is low (say $20), few of the students will want to supply their labor to this market. At low pay, few of the students will feel that this is a profitable use of their time. The low pay does not cover the cost of supplying their labor to the market, i.e. their opportunity cost. If the pay offered were higher (say $100), a greater number of the college students would want to supply their labor to this market. The direct relationship between price and quantity supplied can be illustrated with a supply schedule or a supply curve. A supply schedule is a table showing the different combinations of price and quantity supplied for a good. The supply schedule for Good X is shown in Example 9A below: Example 9A: Market for Good X Supply Schedule Price Quantity Supplied $1 0 2 5 3 10 4 15 5 20 6 25 7 30 FOR REVIEW ONLY - NOT FOR DISTRIBUTION Demand, Supply, and Equilibrium 3 - 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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    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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    Example 8: According to State and F

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    Example 10: When Elvis Presley was

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    4. Pessimistic bias. This is the te

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    ___ 5. An elected official will: a.

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    2. If a certain policy will yield s

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    Chapter 29 Government Regulation of

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    underproduction is the amount that

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    micromanagement results in business

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    market. They may agree with their c

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    Questions for Chapter 29 Fill-in-th

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    ___ 10. The public interest theory

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    4. List the four types of costs imp

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    Chapter 30 Agriculture and Health C

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    weather may cause bumper crops. Bad

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    Security and Rural Investment Act o

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    Example 12: From 1960 to 2013, the

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    1. NHI would provide universal heal

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    d. Insurance providers are not allo

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    Study Guide for Chapter 30 Chapter

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    Answer questions 7. through 10. by

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    ___ 21. If there were no individual

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    Chapter 31 Income Distribution and

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    Income is more equally distributed

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    over a typical career is the accumu

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    Ideal Income Redistribution The ide

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    Poverty - a family whose income fal

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    Appendix: Income Inequality around

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    How is this story an analogy for th

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    ___ 2. In 2013, the Lowest Income 6

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    Problems: 1. Explain the two primar

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    Absolute advantage - when one natio

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    Fiat money - money by government de

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    Nonrivalrous good - a good for whic

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    Absolute advantage, 16-9 Absolute e

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    “Company town”, 25-6 Comparativ

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    Eli Lilly and Company, 22-1 Emergen

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    Houston, Texas, 15-10 Human capital

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    Market, 3-1, 3-8-9 Market basket, 4

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    Political bias, 9-4, 12-7 Political

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    Short run production, 20-2-3 Short-

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    Upturns, 9-4 USDA, 27-9, 30-1-2, 30

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