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 Credits

i. About the author. Acknowledgments. Further recommendations: Chapter from Study Guide to Accompany
Economic Principles, Third Edition by Bredon, 2012 1
Chapters 3
1. The general principles of economics: Chapter 1 from Study Guide to Accompany Economic Principles,
Third Edition by Bredon, 2012 4
2. Demand and supply: Chapter 2 from Study Guide to Accompany Economic Principles, Third Edition by
Bredon, 2012 21
3 . Market behaviour---elasticity, tax and price controls: Chapter 3 from Study Guide to Accompany Economic
Principles, Third Edition by Bredon, 2012 31
4. The costs of production: Chapter 4 from Study Guide to Accompany Economic Principles, Third Edition by
Bredon, 2012 40
5 . Pure competition and monopoly: Chapter 5 from Study Guide to Accompany Economic Principles, Third
Edition by Bredon, 2012 48
6. Monopolistic competition and oligopoly: Chapter 6 from Study Guide to Accompany Economic Principles,
Third Edition by Bredon, 2012 63
7 . Market failure and resource allocation: Chapter 7 from Study Guide to Accompany Economic Principles,
Third Edition by Bredon, 2012 77
8 . The macroeconomic enviromnent and its measurement: Chapter 8 from Study Guide to Accompany
Economic Principles, Third Edition by Bredon, 2012 86
9. Aggregate demand and aggregate supply: Chapter 9 from Study Guide to Accompany Economic Principles,
Third Edition by Bredon, 2012 101
10. Fiscal policy and the public debt: Chapter 10 from Study Guide to Accompany Economic Principles, Third
Edition by Bredon, 2012 110
11 . Monetary policy and the financial system: Chapter 11 from Study Guide to Accompany Economic
Principles, Third Edition by Bredon, 2012 120
12. Economic resources and the labour market: Chapter 12 from Study Guide to Accompany Economic
Principles, Third Edition by Bredon, 2012 137
13. The international monetary systems: Chapter 13 from Study Guide to Accompany Economic Principles,
Third Edition by Bredon, 2012 149
Extension C__!J_卯ters 159
14. The theory of consumer behaviour: Chapter 1 from Study Guide to Accompany Economic Principles, Third
Edition by Bredon, 2012 160
15. International trade and protection: Chapter 2 from Study Guide to Accompany Economic Principles, Third
Edition by Bredon, 2012 170

iv
16. The pricing of economic resources: Chapter 3 from Study Guide to Accompany Economic Principles, Third
Edition by Bredon, 2012 181
17. Aggregate expenditures model and multipliers: Chapter 4 from Study Guide to Accompany Economic
Principles, Third Edition by Bredon, 2012 193
18. The economics of growth: Chapter 5 from Study Guide to Accompany Economic Principles, Third Edition by
Bredon, 2012 211
19. The development of macroeconomic debates: Chapter 6 from Study Guide to Accompany Economic
Principles, Third Edition by Bredon, 2012 220

V
vi

George Bredon is a Senior Lecturer in Economics in the School of Commerce at the University of South
Australia.
George has considerable teaching experience in Australia, South Africa, Singapore, Kuala Lumpur and
Hong Kong. He has also presented and published numerous papers on economics teaching strategies,
methodology and distance teaching technologies. This work has appeared in numerous academic journals
such as The Journal of Economic Perspectives, The Journal of Economic Education and The Journal of the United
States Distance Learning Assodation. In recognition of this work, he received a University of South Australia
Teaching Excellence Award in 1997. Earlier editions of Macroeconomics and Microeconomics, for which George
authored the Study Guides, have won the Australian Award for Excellence in Educational Publishing.

As with any project of this nature, the author has incurred considerable debts in the preparation of the
Study Guide. In particular, I wish to acknowledge Dr Chris Bajada, the late Professor John Jackson, Ron
Mclver, and Ed Wilson, authors of Economic Principles, Third Edition. I would also like to thank the team at
McGraw-Hill, especially Morwenna Crago, Nicole Vanderkroef and Natalie Crouch.

George Bredon

Using the Study Guide, as outlined on the previous page, requires a lot of work. Studying and learning
economics requires substantial commitment on your part. However, by taking a structured approach to the
learning of the material you will achieve better learning outcomes for the investment of your time.
After you have used the Study Guide for three or four chapters, you may find that some sections are of
more value to you than others. Let your experience guide you in its use. However, do not stop using it after
three or four chapters merely because you are not sure whether it is helping you. It will be!
In addition to the material in the Study Guide, there are questions at the end of each chapter in the text.
Some of these questions are similar to questions in the Study Guide, but none is identical. It will be worth
your while to examine all the questions at the end of the chapters and work out or outline answers for them.
Students who have trouble with the problems in the Study Guide will find the end-of-chapter problems useful
in determining whether they have actually mastered their difficulties.
Chapters
The general principles
of economics

INTRODUCTION
conomics is the study of how society goes about using its scarce resources

E efficiently in order to satisfy its unlimited material wants. Chapter 1

starts by giving an overview of the meaning of economics and an idea
of the sorts of issues that it covers. It soon becomes obvious that economics
is not a precise science like physics and chemistry, which are governed by
scientific laws. Despite this, economists do use scientific methods, where
possible, to analyse economic problems and to develop economic policies.
An important consideration here is the use of the ceteris paribus assumption ,
which allows economists to study the influence of one variable while keeping
the influence of other variables constant.
The chapter also discusses two di仔erent perspectives of economics. The
first perspective is provided by positive economics, where statements are seen
as facts and are open to verification. The second perspective is normative
economics, where statements are seen as opinion and involve value judgments
about economic issues. Most of this book is about positive economics; normative
economics is beyond its scope. A clear message from this chapter is that the
answers to economic questions require clear, logical thinking that is free from
bias and other impediments such as the fallacy of composition.
The main thrust of the chapter is that economics is the study of how
societies, like Australia, allocate their relatively scarce supply of resources
(t hat is, land, labour, capital and entrepreneurial ability) to maximise the
satisfaction received from consuming the limited quantity of goods and
services that society has chosen. You should understand that if the demand
for a productive resource is less than the quantity available for use by a
society the resource is not considered to be scarce. As a result, no economic
questions arise about how a society is to make use of the resource. The
most important part of this chapter is the presentation of the production
possibilities table and the production possibilities curve. This economic
2 STUDY GUIDE TO ACCOMPANY ECONOMIC PRINCIPLES 3e

model is presented here because it is very useful in illustrating a number of

economic concepts, including the meaning of scarcity, opportunity costs, the
law of increasing opportunity cost and efficiency. The text spends a lot of time
developing this model in order to demonstrate the essential elements of the
methodology that economists employ. The model is also used to demonstrate
how society's decisions to favour current consumption may predispose that
society to lower growth and fewer consumption opportunities than would
have been the case if it had chosen to invest in capital goods.

When you have finished reading Chapter 1 of the text, you should be
able to:
• define economics
• outline the reasons for studying economics
• understand that the economic perspective entails making rational
decisions about scarcity involving an assessment of marginal benefits
and marginal costs
• identify the four types of economic resources and the type of income
associated with each
• distinguish between land-, labour- and capital-intensity
• state five fundamental questions associated with the economising
problem
• discuss the use of induction and deduction in the development of
economic principles
• explain the nature of economic principles
• explain why economic principles are generalisations and abstractions
• explain why the ceteris paribus assumption is used in economics
• differentiate between microeconomics and macroeconomics
• differentiate between positive and normative statements
• recognise the pitfalls to objective thinking in economics
• explain why full employment and full production are necessary for the
efficient use of resources
• distinguish between allocative efficiency and productive efficiency
• explain how the division of labour and geographical specialisation
underpin productive efficiency
• state the four assumptions made when constructing a production
possibilities table or curve
• discuss the necessity of choice
• construct a production possibilities curve from the relevant data
• define opportunity cost
• state the law of increasing opportunity costs
 CHAPTER 1 THE GENERA L PRINCIPLES OF ECONOMICS 3

I CHAPTER REVIEW I
Economics is about the ways that societies maximise their satisfaction when they face unlimited needs and
wants yet scarce resources to satisfy them. Chapter 1 emphasises that economists draw on the methodology
used by scientists but view human behaviour from a unique perspective. Central to this perspective are
the concepts of scarcity, the assumption of rational behaviour, and decision making that is characterised
by the comparison of marginal benefits and marginal costs. The economic perspective portrays individuals
and institutions making choices in the face of scarcity. Their choices are based on rational self-interest in
that they try to extract the maximum benefit from the limited resources at their disposal. Rational self-
interest implies that a decision will be seen as beneficial if the additional (marginal) benefits outweigh its
(marginal) cost. For instance, when we make a decision to work an extra hour, the economic perspective
would suggest that the decision involves assessing the extra benefits (overtime pay, job satisfaction,
prestige, etc.) relative to the extra cost (leisure time lost, income forgone from alternative employment,
etc.). The decision would not arise in the absence of scarcity, and rational self-interest would dictate that
we would undertake the extra employment only if we benefited more from it than it cost us.
We study economics for several reasons [page 3]. First, an understanding of economics is essential for
our functioning as informed citizens when we assess the impact of different economic and social policies
and the ways that our public officials portray them. Second, economics helps us make better business
decisions and formulate better business strategies. Third, economics pervades our everyday decision making,
sometimes unknowingly, when we use economic principles such as opportunity cost and marginal analysis.
For instance, the optimal allocation of our time requires us to assess the cost of alternatives, something
we do every day.
The economising problem has two important dimensions. First, the demand for goods and services,
the consumption of which provides people with utility, or satisfaction, is virtually unlimited or insatiable.
Second, the economic resources, or the factors of production, that are required to produce those goods
and services are usually limited. That is, productive resources are often scarce relative to society's wants.
This limits the output the economy can produce. Given that societies have unlimited wants but limited
resources, it follows that there will always be unmet demand for a range of products. Economics is the study
of how societies employ scarce productive resources, which may have alternative uses, to produce a range of
commodities and how production is distributed among the members of society to maximise the satisfaction
that a society derives from consumption.
The four types of productive economic resources, or factors of production, are land, capital, labour and
enterprise or entrepreneurial ability [page 4]. Land is the'gifts of nature'or natural resources that may
be used to produce a good or service. In addition to arable land, which is the usual meaning of the term,
land includes forests, mineral deposits, oil reserves, water resources, fisheries and animals. The income
that accrues to land is called rent. Capital is all manufactured aids to production and includes plant and
equipment, machinery and tools. It does not include money or financial capital, which cannot directly be
used to produce goods and services. Additions to the stock of capital that a society possesses are known
as investment. The income accruing to capital is called interest. Words such as'capital', 'investment' and
,interest'occur in everyday usage but have a unique meaning for economists. This difference in definition
often causes problems for first-year students and is a good example of one of the pitfalls to objective
thinking covered later in the text [page 8].'Labour'is a broad term that refers to the productive capabilities
of people. It has two dimensions: the first is quantitative and refers to the number of people that are
available to work in a society; the second is qualitative and refers to the skills, education, training and
4 STUDY GUIDE TO ACCOMPANY ECONOMIC PRINCIPLES 3e

experience, or human capital that people possess. The income accruing to Labour is known as wages.
Enterprise or entrepreneurial ability relates to the activities of entrepreneurs, who perform four related
functions in an economy: they take initiatives in combining the factors of production to produce goods
or services in order to generate profits; they make the routine business policy decisions in firms; they are
innovators who pioneer new products or productive processes; and they take risks. The income accruing to
entrepreneurial ability is known as profit.
The mix of resources used in producing society's goods and services varies from product to product and
service to service. Production processes are said to be land-intensive if they use relatively more land than
other resources. An example here is beef production in Australia where land (including its endowments) is an
important input. Similarly, a greater use of labour relative to other factors of production labels a production
process as labour-intensive. An example here would be a clothing factory that relies heavily on skilled staff
to cut and sew garments. Finally, a capital-intensive process implies that its associated production methods
employ relatively more capital. A car assembly line that uses robots and other automated machinery is an
example of capital-intensive production.
The economising problem contains five components or fundamental questions: How much total output
is to be produced? What combination of output is to be produced? How is this output to be produced? Who
is to receive the output; that is, how is production to be distributed? and How can the system be adapted
to change? [page 5].
Economists use inductive and deductive methods to develop economic principles or models [pages 6-7].
Induction involves the collection and arrangement of apparently unrelated facts with a view to providing a
generalised view of economic behaviour. Induction tries to make sense of a situation by moving from the
specific to the general. It's rather like a detective assembling all the clues at a crime scene and then using
them to develop a generalised picture of the criminal's behaviour. Deduction starts from the other end; it
involves the development of an hypothesis or theory and then moves to the facts to verify it. The detective
starts with a theoretical profile of the likely criminal and then goes looking for the facts needed to confirm
that profile. Figure 1.1 in the text [page 6] illustrates the relationship between facts, principles and policies
and shows the direction of the links between facts and theories implied by induction and deduction.
The terms'law','principle','theory'and'model'are used interchangeably by most economists [page
7]. If there is a difference in interpretation, it is largely one of emphasis, because all the terms refer to
generalisations about economic behaviour which, in essence, bring order and meaning to a series of facts.
For a law, the order and meaning are more apparent and verifiable. The term'law' is more appropriate for
the physical sciences where scientists are able to talk confidently about the nature and cause of theoretical
relationships because they can use controlled experiments to verify their theories. The term'model'implies
a looser order, a less complete explanation of reality. Economists, like other social scientists, work with the
complexities of human behaviour. Relationships between variables are less clearly defined and controlled
experiments are often not possible. However, economists do use the ceteris paribus or'all other things
being equal'assumption when they generalise about economic relationships [page 7]. This allows them
to narrow the focus of their models down to the relationship between just two variables while holding the
influence of all other variables constant. For instance, when an economist asserts that people buy more
tomatoes if the price of tomatoes drops, she is really saying that'all other things being equal, people buy
more tomatoes when their price drops'. Quite clearly such an assertion would be questionable were there
to be a simultaneous increase in people's buying power or a change in the prices of competing vegetables.
Real-world observations often create confusion in the minds of students because other things typically
do not stay constant and so the theories they have learned appear not to work. It is important in those
 CHAPTER 1 THE GEN ERAL PRINCIPLES OF ECONOMICS 5

situations not to reject theory but to re-examine the evidence and clarify which variables have changed and
which have stayed constant. In essence, economic theories have to be abstractions from reality otherwise
they would simply describe the complexity of that reality and hence they would be of little use for policy
purposes.
Economists conduct analyses of economic behaviour at two levels of aggregation: macroeconomics
and microeconomics [page 7] . Macroeconomics concerns itself with the be haVJour of economic enbt1es
at the highest level of aggregation, for example at the level of household, business, government and
foreign sectors. Among other things, it attempts to explain the determinants of total spending of such
groups and, by implication, of the whole economy. It is also concerned with economy-wide issues such as
employment and unemployment, the level of gross domestic product, inflation, economic growth and the
balance of payments. Microeconomics looks at decision making at the level of the individual consumer,
firm, market and so on. Much of microeconomics concerns itself with the determination of prices, and so
it looks at the way consumers and producers gain maximum benefits from consuming and producing goods
and services given their preferences and the constraints that scarcity imposes on them. In exploring these
issues, microeconomics also throws light on the ways that markets operate and the impact that government
policies have on the actions of the participants in those markets.
Economic issues enjoy a lot of media coverage and some of the content is based on fact but much is
based on opinion [pages 7-8]. Positive economics is about what is, was or will be. Positive statements are
testable statements because they can be refuted by looking at empmcal evidence. Normative economics
is about what ought to be. Normative statements embody value judgments about what is good or bad, and
as such are inextricably linked to our philosophical, cultural and religious beliefs.'What ought to be'cannot
be refuted by appeal to the facts.
You need to understand the'pitfalls in objective thinking'[pages 8-9]: bias involves distortions caused
by sticking to beliefs that are not justified by the facts; the fallacy of composition occurs when people
believe that what is true for the individual or small entity must be true for the whole; one event preceding
another does not imply that it caused it (the post hoc, ergo propter hoc fallacy), in much the same way as
correla甘on does not imply causation.
An economy needs to maximise production in order to maximise the satisfaction that society derives
from consumption. Output can only be maximised if the economy is operating efficiently, which means
that there must be full employment of all factors of production, not just labour, and full production [pages
9-10]. Full production implies two things: allocative efficiency, which means that resources are allocated to
producing those goods and services that are most strongly demanded by society; and productive efficiency,
which means that productive resources are being used in the most efficient manner. It also means that the
cost of production is minimised.
The division of labour and geographical specialisation underpin productive efficiency. The division
of labour means that workers can be deployed in ways that use their special human skills and abilities
optimally. Geographical specialisation refers to the special productive attributes of di 忏erent regions. For
instance, dairy production is best located in areas that have good pastures, whereas ski tourism is best
located in mountainous regions.
The production possibilities table or curve represents all the maximum possible output combinations of
goods and services for an economy that is experiencing both full employment and full production [pages
10-12]. The production possibilities curve is a frontier. Points outside the curve are unattainable because
society does not have enough resources to produce those levels of output. Points inside the curve mean that
some resources are either unemployed or not being used efficiently. That is, either full employment or full
6 STUDY GUIDE TO ACCOMPANY ECONOMIC PRINCIPLES 3e

production is not occurring. The production possibilities curve also shows the'trade-offs'or opportunity costs
involved when a society decides to produce more of a particular product. A production possibilities curve is
—
drawn on the basis of four assumptions: (1) efficiency the economy is operating at full employment and
full production; (2) fixed resources一the quantity and quality of the factors of production that are available
to a society are fixed; (3) fixed technology— no new products, productive methods or forms of business
management are adopted during the period of evaluation; and (4) only two products are produced一to
simplify the analysis so it can be represented on a two-dimensional graph. Note that the implication of
these assumptions is that the economy is being analysed at a particular point in time.
A production possibilities table shows all the alternative combinations of goods and services that an
economy can produce if it is operating at full employment and full production. The data can be plotted
on a graph to obtain a production possibilities curve [Figure 1.2 on page 11 in the text]. An opportunity
cost is the amount of a product that must be given up in order to obtain an additional unit of another
product. The production possibilities curve clearly demonstrates the concept of opportunity cost. If a
society is operating on its production possibilities curve and decides that it wants to consume more of one
good, it cannot simply produce more of that good, because production is constrained by a finite supply
of productive resources. Therefore, society must consume less of one good in order to consume more of
another. This means that a society must move along its production possibilities curve. The movement from
one point on a production possibilities curve to another shows the amount of one good that is'traded off',
or the opportunity cost. Production possibilities curves are usually concave to t he origin due to increasing
opportunity costs [page 12]. The law of increasing opportunity costs means that the opportunity cost of
producing additional units of a product rises as more of that product is produced.
If the resources that are used to produce both goods are perfect substitutes, then the opportunity cost
of producing more of one good is constant. For example, the resources that a baker would use to produce
loaves or rolls are identical, so in this case the production possibilities curve is a straight line, downward
sloping to the right. However, in most cases productive resources are not perfect substitutes for each
other. For example, if society attempts to produce more cars, those resources that are most suitable for
their production are initially redirected away from producing the good on the other axis, such as wheat.
To increase the production of cars furthe r, the extra factors of production that are redi rected from wheat
production are increasingly unsuitable, and for each extra car produced, increasingly more resources need
to be redirected away from wheat production. These diminishing marginal returns of productive resources
lead to increasing opportunity costs and explain why the production possibilities curve is concave.
The production possibilities curve can be used to demonstrate a number of important concepts.
(1) Unemployment, or less than full production, occurs when an economy is producing at a point that
is inside the curve [Figure 1.3 on page 14 in the text]. (2) Economic growth can be represented as an
outward movement of the production possibilities curve. Increased economic activity may be t he result
of an increased supply of factors of production, better quality facto rs of production or technical progress.
Improvements in productive capacity do not usually mean that the economy can produce more of all goods
and services [Figure 1.4 on page 15 in the text].
In the text, the production possibilities model is also used to show how societies can weigh up present
choices against future possibilities. A society's current position on its production possibilities curve is t he
basic determinant of the location of its production possibilities curve in t he future [Figure 1.5 on page
16 in the text]. The example assumes that societies really only have the choice of producing consumer
goods or capital goods. Societies that choose to produce a lot of capital goods and few consumer goods
will e忏ectively invest in their futures. This can be shown by a larger outward shift of t heir production
 CHAPTER 1 THE GENERA L PRINCIPLES OF ECONOMICS 7

possibilities curve as compared with societies that choose to produce more consumer goods and less capital
goods. Societies with less current consumption enjoy a higher economic growth rate and predispose their
citizens to higher future consumption levels.

FILL-IN QUESTIONS
Fill in the missing word or phrase. 6. The'other things being equal' or
1. T he basis of the economising problem is that assumption allows economists to investigate the
society's wants are and its econo皿C impact of variable while keeping the
resources are or . This impact of variables . This
gives rise to the idea of opportunity , is the economist's counterpart to the
which is defined as the amount of other products experiment used in the physical .
that must be to obtain a umt of a 7. Macroeconomics is concerned wi山 problems
product. that relate to the as a whole or
2. We study economics so that we can make to large within it. Household,
conclusions about public and foreign sectors are
. K nowledge of economics is also decision groups that are important in the study
important for making decisions. of macroeconomics. Macroeconomic theories
T h1s' explams why large employ focus mainly on the problems of
economists to inte叩ret economic and but also embrace issues such
so that they can make economic as economic and the balance of
decisions.
3. Economists classify productive resources into four 8. Microeconomics is about the behaviour of firms,
types: industnes and when they act as
and ability. The payments to these factors independent . Microeconormcs
are, respecnvely, focuses on an analysis of markets which explain
and how and are deterrruned. These in
4. The concept of 护ves nse to the tum deterrrune the allocation of to
economising problem, which involves five those markets.
questions: 9. Positive economics is concerned with statements
(a) total output is to be produced? of . It deals with what
(b) combmation of outputs 1s to be was or be. Positive statements
produced? can be . When econormsts use
j udgments, they are said to use
(c) are the outputs to be produced?
economics. It concentrates on
(d) 1s to receive and consume these
outcomes that to be.
outputs?
10. Bias is an example of one of the
(e) How can the system accommodate
in objective thinking. It entails an adherence to
?
.
beliefs, which impedes
5. 1s a process whereby are thinking. Emotive language may also distort
collected and systematically analysed. It involves analysis when loaded is used.
moving from the to the general and Another pitfall occurs when something that is
results in the development of . The asserted as true for the part is also passed off
deductive or method is used by as true for the . This is called a
economists as a way of providing a of composition.
to explain human behaviour. This framework
11. The fact that Christmas cards are associated with
1s open to systemahc through
Christmas every year is grounds for believing
the examination of the relevant
that the two are but does not prove
Deduction emphasises that facts are usually
that Christmas cards Christmas.
meanmgless without
8 STUDY GUIDE TO ACCOMPANY ECONOMIC PRINCIPLES 3e
Related to this is the post hoc, er;驴 propter hoc
. If you believed this, then you would
argue that Christmas is caused by Christmas
cards because it is by them.
12. Two conditions need to be satisfied if society is
to maximise its production and hence operate
its curve: full
and full , which in tum implies
efficiency and efficiency.
13. The production possibilities curve is based on
four assumptions:
(a) the economy is operating at full
and production
(b) fixed
(c) fixed
(d) two
14. Points on the production possibilities
or represent the
production attainable given society's
resources. Points outside the
production possibilities curve are
TRUE/FALSE QUESTIONS
Indicate which of the following are true and which are
false.
1. The economic problem involves choosing how
to allocate scarce resources among competing
needs. 团匡l
2. Rational behaviour suggests that people will
undertake some action if the marginal benefit is
greater that the marginal cost. 团匡
3. Investment for an economist usually means the
buying of investments in the securities market.
团匡l
4. Property resources are confined to those that
relate solely to land. [!]由
5. When a business invests in a factory, the return
gained from the machines in the factory is called
'interest'. 团主
6. An economic theory is rather like a cartoon; it
generalises about reality but attempts to capture
some essential feature or features of that reality.
也匡l
7. Ceteris paribus translated from Latin means'after
this, therefore because of this'. [!]匡］
8. The problems associated with inflation are
usually studied using microeconomic theories.
团主
because society has resources. Points
inside the production possibilities curve represent
less than productlon and therefore
suggest that the economy has
resources.
15. The production possibilities curve is usually
to the origin. This indicates that, in
wishing to produce more of one good, society has
to forgo amounts of 如 other. This
implies increasing costs and occurs
because resources are increasingly
adaptable to different uses.
16. In essence, ifwe envisage society as being able
to produce only two types of output, namely
consumer goods and capital goods, then producing
fewer goods in the present will
imply more goods and an increase
in growth in the future. This implies
output of all types in the future. We
can represent growth as an shift of
the production possibilities curve.
9. A policy statement that involves the personal
values of the policy maker falls into the area of
normative economics. 团团
10.'What is good for Ford is good for Australia'
illustrates the fallacy of composition. [!] [I]
11. Allocative efficiency is achieved when a society
allocates resources so as to produce goods and
services in the least costly way. 团困
12. The saying that'there's no such thing as a
free lunch'alludes to the fact that in a full-
employment economy an increase in the
production of one type of good necessarily implies
a decrease in the production of some other good
or service. 团团
13. Product:J.on possibilities curves are concave to
the origin because to gain more of one good a
society has to sacrifice some of the other good.
团甲
14. A point inside the production possibilities curve
signifies a combination of the goods that leave
society with unemployed resources. 团团
15. Increased endowment of resources rather than
technological advance shifts the production
possibilities curve to the right. 团 [I]

MULTIPLE-CHOICE QUESTIONS
Circle the letter that corresponds to the best answer.
1. The study of economics helps us understand:
(a) how we allocate scarce resources to satisfy all
our wants
(b) how we allocate scarce resources among
competing uses
(c) how income can be reallocated to satisfy
human wants
(d) why our wants far outstrip the resources we
have to satisfy them
2. Which of the following statements is not a valid
reason for studying economics?
(a) The operation of the economy impacts upon
each person and it is in our interests to be
better informed about it.
(b) Economics teaches us practical skills that will
help us profit consistently from investments in
the stock market.
(c) Economics teaches us how to avoid some pitfalls
to straight thinking about public policy issues.
(d) Economics teaches us techniques for
analysing the complex economic relationships
we encounter daily.
3. Economists argue that societies satisfy their
unlimited wants by producing goods and services
using land, labour and:
(a) financial capital
(b) real capital
(c) entrepreneurial ability
(d) both (b) and (c)
4. J oe invests in a small printing business that he
operates alone from premises that he rents from
a neighbour. Ifhe hires all his equipment, his
income can be classified as:
(a) wages
(b) wages, rents, interest and profits
(c) interest and profits
(d) wages and profits
5. If Sally uses an inductive approach to solving a
problem :
(a) she first develops an hypothesis about it and
then seeks to test that hypothesis
(b) she looks at the impact of two variables and
keeps the impact of the others constant
(c) she uses the scientific method of analysis
(d) she first looks at the facts related to the
problem and then develops generalisations or
theories about it.
CHAPTER 1 THE GENERAL PRINCIPLES OF ECONOMICS 9
6. The decisions made by households are analysed
usmg:
(a) macroeconomic theory when those decisions
are taken by households acting as a group
(b) microeconomic theory when those decisions
are taken by households acting individually
(c) microeconomic theory when those decisions
are taken by households acting as a group
(d) both (a) and (b) are correct
7. When economists use the Latin phrase ceteris
paribus, they mean that:
(a) all other things are being held constant
(b) one thing follows from another
(c) correlation does not imply causation
(d) facts are meaningless without theory
8. Which of the following statements is not a positive
statement?
(a) Federal tax collections should not be greater
that 25 per cent of GDP.
(b) On average, university graduates enjoy
25 per cent more pay than non-graduates of
the same age .
(c) Unemployment benefits are higher today
than they have ever been.
(d) Women are not as well paid as men.
9 . 'If John Smith can get a seat, so can everyone.
If all students were like him and got to class early,
no one would be without a seat.'This statement
is an example of:
(a) the'fallacy of composition'
(b) the post hoc, ergo pr,叩ter hoc fallacy
(c) correlation being confused with causation
(d) biased thinking
10. Productive efficiency is said to occur when:
(a) resources are allocated to the production
of the goods and services most wanted by
society
(b) resources are allocated to the production of
the goods and services that are least costly to
produce
(c) society chooses the least costly production
techniques for producing the goods and
services 1t wants
(d) society produces goods and services with the
least waste of its labour resources
11. The production possibilities curve is downward
sloping because:
(a) of the law of increasing opportunity costs
10 STUDY GUIDE TO ACCOMPANY ECONOMIC PRINCIPLES 3e

(b) of decreasing opportunity costs
(c) an increase in the production of one good
implies less production of the other
(d) offull employment
12. The concavity of the production possibilities
curve indicates:
(a) that to produce more of one good implies
an opportunity cost in terms of the other
good
(b) that resources are fully employed
(c) the operation of the law of increasing
opportunity costs
(d) that resources are adaptable to alternative
15. For the economy depicted in the table, combination
A suggests that resources are:
(a) fully employed
(b) less than fully employed because no capital
goods are being produced
(c) fully employed but being used inefficiently
because no capital goods are being
produced
(d) less than fully employed because the economy
could potentially produce 30 units of capital
goods as in combination G
16. For an economy that chooses combination C in
如 table, the opportunity cost of producing six

uses extra units of consumer goods would be:

13. The rationale for the law of increasing costs (a) 23 fewer units of capital goods
revolves around the fact that: (b) eight fewer units of capital goods
(a) resources are not perfectly adaptable between (c) three fewer units of capital goods
alternative uses (d) eight more units of capital goods
(b) the production of one good can only be 17. The production possibilities curve for the
undertaken by sacrificing production of other economy depicted in the table exhibits
goods opportunity costs that are:
(c) resources can be switched easily from the (a) increasing because a rise in capital goods
production of one good to the production of production always implies the same sacrifice
another in terms of the production of consumer
(d) there is full employment of resources goods
(b) 1ncreasm
. . g b ecause a nse m consumer
Answer Questions 14, 15, 16 and 17 on the basis of goods production always implies the same
the production possibili如s data 驴ven in the following sacrifice in terms of the production of
table: capital goods
(c) decreasing because a rise in capital goods
Type of A B C D E F G
production always implies a falling sacrifice
good
in terms of the production of consumer
Consumer 36 30 24 18 12 6 。 goods
goods (d) increasing because a rise in consumer goods
Capital 。 15 23 26 28 29 30 production implies an increasing sacrifice in
goods terms of capital goods production
18. A shift to the right of the production possibilities
14. The production possibilities curve for the
curve would be caused by:
economy depicted in the table is:
(a) an increase in the quantity of resources
(a) a downward-sloping straight line
available to a nation
(b) a downward-sloping line that is concave to
(b) an improvement in technology
the origin of the graph
(c) an improvement in the level of education
(c) an upward-sloping straight line
(d) all of the above
(d) a downward-sloping line that is bowed
inwards towards the origin of the graph

WORKED DISCUSSION QUESTION
The following is an example of the approach that
students should take in answering discussion questions.
Question: Distinguish between allocative efficiency
and productive efficiency. Give an illustration of:
(a) achieving allocative, but not productive,
efficiency
(b) achieving productive, but not allocative,
efficiency [Conceptual question 5, page 22 of
the text.]
Answer: Ifa society wishes to maximise its production and
the utility obtained by its members, both full employment
and full production must occur. Full employment means
that all of a society's productive resources—land, labour,
capital and entrepreneurial ability-are being used. Full
production means that a society's resources are being
used for the purposes for which they are best suited. Full
employment can occur only if both allocative efficiency
and productive efficiency occur simultaneously. Alloca-
rive efficiency means that productive resources are being
used to produce those goods and services that are most
strongly demanded by society. Productive efficiency
means that resources are being used to produce those
goods and services for which they are most suited; this
in tum will lead to the least-cost methods of production.
DISCUSSION QUESTIONS
1. Imagine that you want to buy l kilogram of soap
powder. You notice that soap powder comes in
two sizes: a 1 kilogram box or a 500 gram box.
The 1 kilogram box costs $4.60 and the 500 gram
box costs $2.99. Use the concepts of marginal cost
and marginal benefit to explain why a rational
consumer would buy the 1 kilogram box. (Assume
that your decision is driven purely by price.)
2. What are your reasons for studying economics?
Do they accord with those given in the text?
3. Discuss the nature of the economising problem .
4. What is meant by'material wants'? What form
do they take?
5. Discuss the four types of economic resources and the
income accruing to each type. Why is it sometimes
difficult to identify the exact income type?
6. Explain the difference between inductive and
deductive reasoning.
7 . 'A road map and economic theory have some
common features; both are generalisations and
both abstract from reality.'Discuss this statement
and show how we implicitly employ ceteris
paribus assumptions when using a road map to
get from A to B.
CHAPTER 1 THE GENERAL PRINCIPLES OF ECONOMICS 11
(a) An example of achieving allocative efficiency
沁thout attaining productive efficiency would
be where goods that are in demand get
built in a costly manner. For instance, some
vintage cars command a high price because
of the strong demand that car enthusiasts
have for them. However, in trying to increase
production to meet that demand some
companies may choose to use production
methods that result in a car that is more costly
to build than would be the case if modern
technology were used. For instance, a hand
drill may be used rather than a power drill
in the belief that the former tool is consistent
with the hand-built image that the car
company wants to promote.
(b) An example of achieving productive
efficiency without allocative efficiency would
occur if motor vehicle builders employed the
latest and most efficient robotic technology
to build cars in the cheapest possible way
but these cars remained unsold while the
increased demand for other commodities,
such as houses, remained unsatisfied.
8. Discuss the difference between microeconomics
and macroeconomics.
9. What is the essential difference between positive
and normative economics?
10. What impediments are there to 'valid economic
reasoning'? Give examples to illustrate your
understanding.
11. How do human specialisation and geographical
specialisation enhance productive efficiency?
12. Could a production possibilities curve be upward
sloping? If not, why not?
13. What has the downward-sloping nature of the
production possibilities curve got to do with the
concept of opportunity cost? Explain.
14. What does the concavity of the production
possibilities curve tell us about changes to
opportunity costs as a nation attempts to produce
more of one good? Demonstrate the change to
opportunity costs on a diagram.
15. What does the concavity of the production
possibilities curve tell us about the adaptability of
resources to alternative uses?
16. How can present resource allocation decisions
influence an economy's rate of economic growth?
12 STU DY GUID E TO ACCO MPANY ECO NOMI C PRIN CI PLES 3e

FILL-IN QUESTIONS
1. unlimited; scarce; limited; cost; forgone [page 4; 9. fact; is; could; tested; value; normative; ought
page 12) [pages 7- 8]
2. well-informed; policies; business; corporations; 10. pitfalls; preconceived; clear (objective);
data; rational [page 3] tern血ology; whole; fallacy [pages 8—9]
3. land; labour; capital; entrepreneurial; rent; wages; 11. correlated; cause; fallacy; preceded [page 9]
interest; profits [page 4] 12. on; production possibilities; employment;
4. scarcity; How much; What; How; Who; change production; allocative; productive [pages 9- 1OJ
[page 5) 13. employment; resources; technology; products
5. Induction; facts; specific; principles [page 10]
(generalisations); hypothetical; model (theory); 14. curve; frontier; maximum; limited; unattainable;
hypothesis testing; facts; theory [page 6) insufficient; maximum; unemployed [pages
6. ceteris paribus; one; other; constant; controlled; 10- 11]
sciences [pages 7) 15. concave; increasing; opportunity; less [pages
7. economy; aggregates (sectors); business; 12- 13]
government; unemployment; inflation; growth; 16. consumer; capital; economic; more; outward
payments [page 7) [pages 16- 17]
8. consumers; decision makers; prices; quantities
(outputs); resources [page 7]

TRUE/FALSE QUESTIONS
1. T [page 4] 5. T [page 4] 9. T [page 7] 13. F [page 12]
2. T [page 3] 6. T [pages 6—7] 10. T [page 8] 14. T [pages 14---15]
3. F [page 4] 7. F [page 7] 11. F [page 1OJ 15. F [pages 13- 15]
4. F [page 4] 8. F [page 7] 12. T [page 11- 12]

MULTIPLE-CHOICE QUESTIONS
1. b [page 4] 6. d [page 7] 11. C [page 12) 16. b [pages 11- 12]
2. b [page 4] 7. a [page 7] 12. C [pages 12—13] 17. d [pages 11—13]
3. d [page 4] 8. a [page 7] 13. a [pages 12~ 13] 18. d [pages 13~ 15]
4. d [page 4] 9. a [pages 8— 9] 14. b [pages 10—13]
5. d [page 6] 10. c [page 10] 15. a [pages 10—12]

DISCUSSION QUESTIONS
1. [pages 3—4] 5. [page 4] 9. [page 7] 13. [pages 12—13]
2. [page 3] 6. [page 6] 10. [pages 8- 9] 14. [pages 12- 13]
3. [page 4] 7. [pages 6- 7] 11. [page l OJ 15. [page 12]
4. [pages 4-5] 8. [page 7] 12. [pages 10-12] 16. [pages 13- 15]

APPENDIX: GRAPHS AND THEIR MEANING

This appendix covers the use of grap hs in economics. Graphs are a way of visually representing economic
relationships. In them we are ab le to show not on ly t he direction of relationships but also the way that
all variables might impact on the relationships. Graphs are extremely efficient at capturing information:
the axes give an indication of the units of measurement and whether the variab les are independent or
 CHAPTER 1 THE GENERA L PRIN CIPLES OF ECO NOM I CS 13

dependent; the slope of curves tells us whether the variables are positively or negatively related or even
whether there is any relationship at all between them; the way the slope changes tells us how the dependent
variable alters as the independent variable changes; the size of the intercepts indicates the impact of other
variables; intersection points provide insights about equilibrium conditions; even the juxtaposition of
one curve relative to another can yield useful insights. In fact, you will find that most of the important
theoretical issues in this book can be captured using graphs. Generations of economics students have used
these pictorial aids to help them understand and remember the rich conclusions of economic models. A little
time spent mastering graphs will pay enormous dividends in your future study of economics.

When you have finished reading the appendix to Chapter 1 in the text,
you should be able to:
• explain why economists use graphs
• construct a graph of two variables using data contained in a table
• identify dependent and independent variables
• distinguish between a direct relationship and an inverse relationship
• calculate the slope and vertical intercept of a straight line
• write a linear equation
• calculate the slope of a non-linear curve at any given point
• understand the relationship between slope and marginal changes.

I APPENDIX REVIEW I
Economists use graphs to highlight the nature of the relationships between the variables contained in economic
models. Although graphs (along with mathematical equations) are sometimes depicted as alternatives to
verbal explanations of economic models, they contain a compact description of economic models, which is
usually relatively meaningless unless it is accompanied by some verbal explanation. Graphs are usually two-
dimensional. They allow us to focus on the relationship between just two variables, one independent and
the other dependent, all other things remaining the same, or ceteris paribus [pages 26-7].
Graphs are plotted from data about two variables taken from a table. You need to keep three issues in
mind when drawing a graph. First, choose the units of measurement and the scale that is to be used on the
horizontal and vertical axes so that the data fits on the axes. The scale that is chosen should not distort the
nature of the relationship. The axes should be carefully labelled. Second, make your graph large so that it
can be easily interpreted. Third, plot your data points at the intersection of the perpendiculars that you have
dropped from appropriate points on the axes. Depending on the nature of the relationship, connect these data
points using straight lines or smooth curves. You may find it helpful to use graph paper. The points on a graph
are sometimes represented as coordinates. For instance, point din Figure A1.1 [page 24] can be represented
as (300 200) because it represents a combination of $300 of income and $200 of consumption. The convention
is to put the x- or independent variable first, followed by they- or dependent variable, that is, (x, y).
14 STUDY GUIDE TO ACCOMPANY ECONOMIC PRINCIPLES 3e

Economic models describe a cause-and-effect relationship between independent and dependent variables.
When the independent variable changes it causes a change in the dependent variable. Economists usually
follow the strict convention developed by mathematicians of putting the independent variable on the
horizontal or X-axis and the dependent variable on the vertical or Y-axis, but this is not always the case
[pages 26-7] (for instance, see the demand and supply curves in Chapter 2).
There are three things you need to remember when interpreting graphs. (1) A positive sign for the
slope of a graph indicates a direct relationship between the independent and dependent variables and is
illustrated by an upward-sloping curve. An increase (decrease) in the independent variable is associated
with an increase (decrease) in the dependent variable. (2) A negative sign for the slope indicates a negative
or indirect relationship between the variables and is drawn as a downward-sloping curve. It indicates that
an increase (decrease) in the independent variable is associated with a decrease (increase) in the dependent
variable. (3) Be careful about assuming that there is a causal relationship simply because of the association
between the variables. Three scenarios are possible: the variables are related to each other; they are related
to another, third variable; or their association occurs purely by chance.
The slope of a straight line is measured by dividing the vertical change in Yby the horizontal change
in X (sometimes written as dY/dX or LiY/LiX in mathematics textbooks) or the rise over the run. A positive
slope indicates a direct relationship between the independent and dependent variables, whereas a negative
slope signifies that there is an inverse relationship between the two variables. The vertical intercept
measures the value at Ywhen X equals zero and is depicted by extending the curve back to where it cuts
the Y-axis. The equation for a straight line is y = a + bx, where a is the Y-intercept and b is the slope.
Given the a and b values in the formula, the value of the dependent variable can be calculated for any value
of the independent variable [pages 28-9].
Unlike the constant slope of a straight line, the slope of a curve varies along its length and can be
calculated at a point by the slope of a tangent at that point (i.e. the slope of a line just touching the
curve at that point) [pages 28-9].

FILL-IN QUESTIONS
Fill in the missing word or phrase. effects of all variables that may affect
1. The vanable 1s usually plotted on the dependent variable.
the vertical axis and the variable is 4. The slope of a straight line is calculated by the
plotted on the axis. Changes in the change divided by the
values of the vanable are associated change and is throughout its
with changes in the variable. entire length. The slopes of non-linear curves
2. An upward-sloping line shows a or over their length, but the slope at a
direct relationship, while a downward-sloping line particular can be determmed from
shows a or mverse relanonsh1p. If the slope of a at that point.
there is no relationship between the variables, the 5. In the equation y = 5 + 2x, 5 is the
line would be either or and 2 is the , y is the
depending on how the axes are labelled. variable and xis the variable. This
3. Economists use the or'all other equanon shows a or
things being equal'assumption in order to relationship between the dependent and
understand the relationship between two independent variables.
and the confounding
 CHAPTER 1 THE GENERA L PRINCIPLES OF ECONOMICS 15

TRUE/FALSE QUESTIONS
Indicate which of the following are true and which are
false.
1. Economists use graphs as a way of showing
economic relationships. 团 F
2. An upward-sloping straight line represents an
indirect linear relationship between economic
variables. 团 匡］
3. Mathematicians always plot the independent
variable on the vertical axis and the dependent
variable on the horizontal axis, which is a
practice not followed by economists. [IJ W
4. The ceteris pa动us assumption is used by
economists to keep variables other than the
independent variable constant. 团 f
5. A vertical line has a zero slope, whereas a
horizontal line's slope is infinity. IT] 田
6. A negative slope coefficient indicates an indirect
relationship between the independent and
dependent variables. IT] IT]
7. For the equation y = 100 + l Ox, the vertical
intercept is equal to 100 and is equal to the value
of y when x equals zero. 团由
8. The slope of a curve is measured by the change
in the independent variable divided by a change
in the dependent variable. [fl [I]
9. The slope of a point on a non-linear curve cannot
be detem让ned because it changes at each point
on the curve. 团匡l
10. If the vertical intercept of a straight line is - 20,
there is an inverse relationship between the two
variables. 团 匡］
11. In the equation y = a - 1Ox, for values of x = 10
and y = 100, a must equal 200. [fl [Il
12. When the (x, y) coordinates of two points are
(10, 20) and (20, 10), the slope of a straight line
between the points is —1. 团 F
13. For the two pairs of (x, y) coordinates (10, 6) and
(20, 10), the equation of a straight line between
the points is y = 2 + 0.4x. 团 F
14. A negative or indirect relationship between x
and y proves that there is no causal relationship
between the two variables. 团匡l
15. The slope between two points of a total curve is
a measure of the marginal changes between the
two points. 团 F

MULTIPLE-CHOICE QUESTIONS
Circle the letter that corresponds to the best answer. (c) the line would shift down and its slope would
1. In a graph where X is on the horizontal axis and rise
Y is on the vertical a.xis, the slope of a straight line (d) the line would shift up but its slope would
is given by: remain the same
(a) the change in Y divided by the change in X Questions 4, 5, 6 and 7 relate to data sets (1), (2), (3)
(b) the change in the dependent variable divided and (4) in the tab/,e below.
by the change in the independent variable
(1) (2) (3) (4)
(c) both (a) and (b) are correct
X y X y X y X y
(d) the change in X divided by the change in Y
1 15 10 95 。 16 3 16
2. You are told that two points on a linear line have
the (x, y) coordinates (0, 10) and (20, 110). The 2 20 20 90 2 15 2 14
equation for the line will be: 3 25 30 85 4 14 1 12
(a) y = 10 + 11Ox 4 30 40 80 6 13 。 10
(b) y = 10 + 5x
4. There is a positive or direct relationship between
(c) y= 10 —5x
the independent variable (x) and the dependent
(d) y = 20 + lOx
variable (y) in data sets:
3. You are told that the equation of a straight line
(a) 1 and 4
is y = 210 + 0.5x. If the intercept term were to
(b) 2 and 3
increase by 1.5:
(c) 3 and 4
(a) the line would shift down and its slope would
fall (d) 1 and 3
5. The m. tercept on the vertical axis of data set (4) is:
(b) the line would shift down but its slope would
remain the same (a) 0
(b) 12
16 STUDY GUIDE TO ACCOMPANY ECONOMIC PRINCIPLES 3e

(c) 10 (c) Q = 2.5 - 0. l 25P

(d) 16 (d) Q = - 20 + 8P
6. The equation for data set (4) is:
(a) y = 10 + 2x Answer questions 12, 13 and 14 based on the dia,伊am
(b) y = 10 - 2x
below.
(c) x = 10 + 0.5y 50

(d) y = 3 + 16y ，一 H-
7. For data set (3), the y value associated with an x 40

抖
I
value of 15 will be: tSO:>
0
32
(a) 2 a6
店 8~ A --
(b) 1 l!
J3 iJ
>V 0 日－ ~ I\
_,,
(c) 7.5 '
!,'";,. I
(d) 8.5 1十 ;, ..... I
I
,/
10
I I
Answer questions 8, 9, 10 and 11 based on the diagram I I

below.

。
10 20 30 40 50
4 .00 Qua ntity
12. The slope of the line that is tangent to the curve
3.00 at point A is:
(a) 0.5
2
CI亡

(b) - 0.5
。
Id3

(c) 30/40
1.00 (d) - 2.0
13. The slope of the line that is tangent to the curve
at point C is:
。

4
8 12 16 20 (a) infinity
Qua nt ity
(b) 22
8. In the graph, the slop e of the curve: (c) undefined
(a) is negative, which implies an inverse (d) zero
relationship between price and quantity 14. T he slope of the line that is tangent to the curve
(b) is positive, which implies an inverse at point Bis:
relationship between price and quantity (a) 0.67
(c) implies a direct relationship between price (b) - 3/ 2
and quantity
(c) — 20 /30
(d) is greater than one, which implies a negative
(d) - 2
relationship between price and quantity
15. Assume that the quantity of strawberries (Q) that
9. In the graph, the slop e of the line is:
farmers are willing to supply is given by the price
(a) - 8 (P ) that they fetch on the market and can be
(b) - 2/20 expressed by the equation Q = 1000 + 25P where
(c) —1/8 Q is the number of boxes and Pis the price per
(d) 8 box. Using this equation, it can be said that:
10. T he value of the vertical intercept is: (a) when the price is $ 10 per box the number of
(a) 20 boxes supplied will be 1250
(b) - 2.5 (b) when 1000 boxes are supplied the market
(c) the value of quantity when price is zero price will be $ 10
(d) the value of price when quantity is zero (c) each unit increase in price will result in 1000
11. T he linear equation for the line is: extra boxes being supplied
(a) P = - 2.5 + 0.1 25Q (d) a $25 rise in price per box results in 1000
boxes being supplied
(b) P = 2.5 —0.125Q
 CHAPTER 1 THE GEN ERA L PRINCIPLES OF ECONOMICS 17

DISCUSSION OU ES TIO NS
1. What purpose do graphs serve for economists?
Describe the three stages undertaken when
drawing a graph.
2. How is the slope of a graph measured? Explain
what is meant by a slope of 1? A slope of -1?
A slope of0.5?
3. What happens to the value of the slope and/or
vertical intercept when a curve shifts in a parallel
fashion? What is the value of the vertical intercept of
a cUIVe that goes through the origin of the graph?
4. How would you draw a line that has a slope equal
to zero? What does a line that has an infinite
slope look like?
5. In later chapters you will learn that the quantity
demanded of a product and its price are
negatively related. What happens to the quantity
demanded when price rises? What happens when
price falls? How would you show this on a graph?
6. You are told that potential home-buyers buy
fewer houses when the mortgage rate rises.
Which of these variables is the independent
variable and which is the dependent variable?
7. What is the ceteris paribus assumption? Why is it
used in economic relationships? What happens
to curves on a graph when the ceteris paribus
assumption is relaxed?
8. Explain the different ways employed by economists
and mathematicians for constructing two-variable
graphs. Is 小e inte巾retation any different?
9. The consumption- income relationship for
Arnandla, a newly emergent African nation, is
given by the equation C= 5000 + 0.9Y(where
Yis disposable income and C is consumption
expenditure). Select a few imaginary Yvalues and
construct a table of corresponding values for C.
What is the value of the vertical intercept and the
slope for this consumption function?
10.'Whereas you can estimate the slope of a straight
line, this is not possible for a non-linear curve.'
Do you agree? Justify your answer.

FILL-IN QUESTIONS
1. dependent; independent; horizontal; 4. vertical; horizontal; constant; change; point;
independent; dependent [pages 24---6] tangent [pages 26—7; pages 28— 9]
2. positive; negative; horizontal; vertical [pages 5. intercept; slope; dependent; independent; direct;
25- 6] positive [pages 28- 9]
3. ceteris paribus; variables; ignore; other [pages
26- 7]

TRUE/FALSE QUESTIONS
1. T [pages 24-5] 5. F [pages 27—8] 9. F [page 29] 13. T [pages 24-8]
2. F [page 25] 6. T [pages 27- 8] 10. F [page 28] 14. F [pages 25- 6]
3. F [pages 26-7] 7. T [pages 28—9] 11. T [page 28] 15. T [pages 26-8]
4. T [pages 26-7] 8. F [pages 26- 28] 12. T [pages 24---闵

MULTIPLE-CHOICE QUESTIONS
1. c [pages 26- 8] 5. c [pages 27- 9] 9. c [pages 26- 7] 13. d [pages 28- 9]
2. b [pages 28— 9] 6. a [pages 28—9] 10. d [pages 27—9] 14. b [pages 28— 9]
3. d [pages 26- 9] 7. d [pages 28- 9] 11. b [pages 28- 9] 15. a [pages 25-6]
4. a [pages 25---6] 8. a [pages 26—7] 12. a [pages 28—9]

DISCUSSION QUESTIONS
1. [page 24) 4. [pages 27- 8] 7. [pages 26-7] 10. [pages 28- 9]
2. [pages 26—8) 5. [pages 25—6] 8. [pages 2 仓7]
3. [pages 26- 7) 6. [pages 26- 7] 9. [pages 25- 8]
Another random document with
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 "There's a dash about that fellow that's fine!" remarked Trafford to Von
Hügelweiler, who was standing near him, wrapped during inaction in a big
military ulster.

The Captain of the Guides had already in his own mind ruled
Schmolder out of the competition, exaggerating his faults to himself with
egotistical over-keenness. Einstein, however, was skating so brilliantly that
Von Hügelweiler was beginning to experience the deepest anxiety lest he
should prove the ultimate winner of the coveted trophy. The anxiety indeed
was so deep that he refused to admit it even to himself.

"Wait till we come to the second part of the competition—the free-

skating," he retorted. "Free-skating requires great nerve, great endurance,
and absolute fitness. It is there that Einstein will fail."

When Einstein had finished his compulsory figures amid a round of

applause, Von Hügelweiler slipped off his long ulster. For a moment a bad
attack of stage-fright assailed him,—for there is nothing quite so nerve-
racking as a skating competition before a critical judge and an equally
critical audience,—and his heart was turned to water and his knees trembled
with a veritable ague; but a cheer of encouragement restored him to himself,
and he struck out for glory. With head erect, expanded chest, arms
gracefully disposed, and knee slightly bent, he was about as pretty an
exponent of Continental skating as one could wish to see. He travelled
rapidly and easily on a firm edge, his turns were crispness itself, the
elegance of his methods was patent to the least initiated.

General Meyer following slowly with note-book in hand, smiled

appreciatively, as he jotted down the marks gained from time to time by his
brilliant "counters," "brackets," and "rocking turns." The crowd roared their
applause, and in the music of their cheers, Von Hügelweiler's depression
vanished, and his heart sang an answering pæan of jubilee. Like most
nervous, self-centred men, he most excelled before an audience when once
the initial fear had worn off. And now he was skating as he had never
skated before, with a dash, energy, and precision that drew redoubled cheers
from the spectators and audible applause from the royal box. Even Meyer,
he reflected, with all his malice, could hardly dare to give another the prize
now; to do so would be not merely to violate justice, but to insult the
intelligence of every man and woman on the ice.

At the conclusion of his effort, Trafford congratulated the Captain

warmly on his performance. Von Hügelweiler's dark eyes shone bright with
pleasure. Already he saw himself crowned with the invisible laurels of
undying fame, receiving the massive silver trophy from the royal hands.

"Thanks, my American friend," he said, heartily, "go on and prosper."

With a few bold strokes Trafford started on his attempt to do superbly

what others had done faultlessly. His style instantly arrested attention. Here
was no lithe figure full of lissom vitality and vibrant suppleness; no
graceful athlete whose arms and legs seemed ever ready to adopt fresh and
more elegant poses. But here was an exponent of the ultra-English school, a
rigid, braced figure travelling over the ice like an automaton on skates, an
upright, inflexible form, sailing along on a perfect edge at an amazing
speed, with a look of easy contempt on his face alike for the difficulties of
his art and the opinion of his watchers.

Ever and again there was an almost imperceptible flick of the ankle, a
slight shifting of the angle of the shoulders, and some difficult turn had
been performed, and he was travelling away in a slightly different direction
at a slightly increased rate of speed. The crowd watched intently, but with
little applause. They felt that it was wonderful, but they did not particularly
admire.

To Von Hügelweiler,—trained as he was in the theory and practice of

the "Continental" school,—the performance seemed stiff and ugly.

"Mein Gott," cried Einstein, "at what a speed he travels!"

"He wants a bigger rink than the Rundsee!" exclaimed Schmolder. "A
man like that should have the Arctic Ocean swept for him."

Von Hügelweiler was less complimentary.

 "I don't think we need fear the American, my friends," he said. "He
skates his figures fast and big, but with the grace of a dummy. Such
stiffness is an insult to the Rundsee, which is the home of elegant skating.
See with what a frowning face General Meyer follows this American
about!"

"If you can learn anything from Meyer's face," said Captain Einstein
drily, "you should give up the army and go in for diplomacy."

"Wait till he comes to the free-skating!" went on Von Hügelweiler.

"That needs a man with joints and ligaments—not a poker. Our friend will
find himself placed last, I fear; and I am sorry, for he has come a long way
for his skating, and he seems an excellent fellow. I will say a few words of
encouragement to him."

But Trafford had just then momentarily retired from the rink. He was
changing his skates for the pair he had bought at Frau Krabb's the previous
evening.

At the free-skating, which followed, Franz Schmolder broke down

altogether. His knee failed him when he had performed for three minutes
instead of the necessary five. Einstein, who followed, did well up to a point.
But five minutes' free-skating is a fairly severe test of condition, and the
big, burly soldier did not finish with quite the dash and energy he had begun
with. Von Hügelweiler, however, gave another splendid display of effective
elegance, and again drew resounding cheers for his vigorous and attractive
performance. He himself made no doubt now that he was virtually the
winner of the King's Cup. He had worked hard for his success, and was
already beginning to feel the glow that comes from honourable effort
generously rewarded. Meyer would doubtless be sorry to have to place him
first, but in the face of Einstein's and Schmolder's comparative failure, and
the American's stiffness, no other course would be open to him. Von
Hügelweiler, however, watched Trafford's free-skating with interest,
dreading, with an honest and generous dread, lest his amiable rival should
disgrace himself. To his astonishment, Trafford was no longer a petrified
piece of anatomy skating with frozen arms and arthritic legs. He beheld
instead an exponent of the Continental school, who seemed to have in his
repertoire a whole armoury of fanciful figures and astounding tours de
force. Trafford was as free and unrestrained now as he had been severe and
dignified before. Graceful, lissom, filled with an inexhaustible,
superabundant energy, he performed prodigies of whirling intricacy, dainty
pirouettings, sudden bold leaps, swift changes of edge, all with such
masterful daring and complete success that the whole ring of spectators
cheered itself hoarse with enthusiasm.

"Bravo! bravo!" cried Von Hügelweiler, clapping him heartily on the

back at the conclusion of his effort. "It is good to see skating like that! If
you had skated the preliminary figures with the same zeal you have
displayed just now, we Grimlanders would have to deplore the departure of
a national trophy from our native land."

Trafford accepted the left-handed compliment in silence, lighting a

cigarette while General Meyer totted up the amount of marks he had
awarded to the several competitors. After a few minutes' calculation,—and
after his figures had been checked by a secretary,—the General skated back
to the front of the royal box and announced his decision to the King. Then,
at a word from his Majesty, a gentleman in a blue and yellow uniform
placed a gigantic megaphone to his lips, and turning it to the various
sections of the crowd, announced:—

"The King's Prize: the winner is Herr George Trafford; second, Captain
Ulrich Salvator von Hügelweiler."

The American received the announcement with complete outward

calmness. And yet those hoarsely spoken words had touched a chord in his
heart that he had believed snapped and irrevocably broken. For a moment
he lived, for a moment the cheers of his fellow men had galvanised into
healthy activity the dead brain that had lost interest in all things under the
sun. The success itself was a trivial affair, yet in a magic moment he had
become reconciled to life and its burden, vaguely thankful that he had kept
the first barrel of his revolver free from powder and ball.

"Congratulations, Herr Trafford," said General Meyer, who now

approached him with proffered hand. "Escort me, I beg, to his Majesty, who
will present you with the cup. You will also receive a royal command to
dine to-morrow night at the Palace."
 "Congratulations, Herr Trafford," said another voice.

Trafford looked round and beheld the competitor who had been placed
second. The tone of the felicitation was one of undisguised bitterness, the
face of the speaker was the ashen face of a cruelly disappointed man. And
Von Hügelweiler, honestly believing himself cheated of his due,—and not
bearing to see another receive the prize which he felt should have been his,
—slunk from the scene with hate and misery and all uncharitableness in his
tortured soul. Then, as he took off his skates, the cheering broke out again,
and told that the American was receiving the trophy from the King's hand.
An ejaculation of bitterness and wrath burst from his lips.

Hardly had he breathed his angry word into the frosty air when a small
hand plucked at his fur-lined coat, and looking round he perceived a
charming little face gazing into his own.

"Why so cross, Captain?'" asked the interrupter of his execration.

Captain von Hügelweiler's hand went up to the salute.

"Your Royal High——"

"Hush! you tactless man," said the Princess Gloria, for it was no other.
"Do you want to have me arrested? For the sake of old times," she went on,
putting her arm in his, "I claim your protection."

But Hügelweiler had not thought of delivering the exiled Princess to the
authorities! For one thing, his mind was too occupied with self-pity to have
room for State interests; secondly, he was still in love with the fascinating
creature who looked up at him so appealingly, that he would sooner have
killed himself than betrayed the appeal of those wondrous eyes.

They were strolling away from the Rundsee in the direction of the town,
and a straggling multitude of the spectators was streaming behind them in
the snowy Thiergarten.

Von Hügelweiler's lips trembled a little.

 "It is good to see you again, Princess," he whispered. "It is comforting,
just when I need comfort."

"Comfort!" echoed his companion with a grimace. "You were swearing,

Ulrich! You are a good sportsman, you should take defeat with better
grace."

"I can accept open defeat, Princess, like a man, though I had set my
heart on the prize. But I was not fairly beaten. The American skated his
figures as ungracefully as they could be skated."

"Why, he skated marvellously," declared the Princess enthusiastically. "I

never saw such speed and daring on the ice. The man must have been born
with skates on. I never saw a finer——"

"Nonsense!" broke in the irate Captain, forgetting both manners and

affection in the extremity of his wrath. "He won because General Meyer
had a grudge against me. He asked me last night to do a dirty piece of work.
In the name of loyalty he wished me to murder a civilian; but I am a Von
Hügelweiler, not an assassin, and I refused, though I knew that by so doing
I was ruining my chances of success to-day."

The Princess Gloria pressed his arm sympathetically.

"The King's service frequently involves dirty work," she said, looking at
him out of the corner of her eyes.

"So it appears!"

"Why not embrace a service that calls for deeds of valour, and leads to
high honour?"

Von Hügelweiler looked at the bright young face that now was gazing
into his so hopefully. A thousand memories of a youthful ardour, born
amidst the suns and snows of Weissheim, rushed into his kindling heart. He
had lost the King's Cup; might he not wipe out the bitter memory of defeat
by winning something of incomparably greater value? There was a price, of
course; there always was, it seemed. Last night it was the honour of a clean
man; to-day it was loyalty to his King. But how much greater the present
bribe than that offered by the Commander-in-Chief! The intoxication of
desire tempted him, tempted him all the more shrewdly because of his
recent depression. What had he to do with a career that was tainted with
such a head as the scheming Jew, Meyer? What loyalty did he owe to a man
served by such officers and such method as was Karl? The Princess's eyes
repeated their question, and their silent pleading shook him as no words
could have done.

"What service?" he asked falteringly.

"My service," was the hushed retort.

"And the reward?" he demanded.

"Honour."

"And—love?"

There was silence momentary, but long enough for the forging of a lie.

"Perhaps," she breathed, looking down coquettishly.

A great light shone in the Captain's eyes, and the sombre beauty of his
face was illumined by a mighty joy.

"Princess Gloria," he cried, "I am yours to the death!"

CHAPTER SIXTH

"WEIN, WEIB, UND GESANG"

 That evening Mr. and Mrs. Robert Saunders were George Trafford's
guests in a private room of the Hôtel Concordia. In the centre of the dining
table stood a big silver trophy of considerable value and questionable
design. As soon as the soup had been served, Trafford solemnly poured out
the contents of a champagne bottle into its capacious depths. He then
handed it to Mrs. Saunders.

"Felicitations," she said, taking the trophy in both hands, "I drink to St.
Liedwi, the patron saint of skaters, coupled with the name of George
Trafford, winner of the King's Cup."

Saunders was the next to take the prize in his hands.

"I drink a health unto their Majesties, King Edward of England and
King Karl of Grimland, and to the President of the United States," he said;
and then bowing to his host, "Also to another good sportsman, one Nervy
Trafford. God bless 'em all!"

Trafford received the cup from Saunders, his lips muttered something
inaudible, and tossing back his head he drank deep.

"What was your toast, Mr. Trafford?" demanded Mrs. Saunders quietly.

The winner of the cup shook his head sagely.

"That is a secret," he replied.

"A secret! But I insist upon knowing," returned the lady. "Tell me, what
was your toast?"

Trafford hesitated a moment.

"I toasted 'Wein, Weib, und Gesang,'" he announced at length.

"Wine, woman, and song!" repeated Mrs. Saunders. "A mere abstract
toast, which you would have confessed to at once. Please particularise?"

"The 'wine,'" said Trafford, "is the wine of champagne, which we drink
to-night, '89 Cliquot. 'Woman,' is Eve in all her aspects and in all countries
—Venus victrix, sea-born Aphrodite, Astarte of the Assyrians, Kali of the
Hindoos. God bless her! God bless all whom she loves and all who love
her!"

"And the song?" demanded Saunders.

"The song is the one I have heard one hundred and fifty times since I
have been here," replied Trafford. "Its title is unknown to me, but the
waiters hum it in the passages, the cabmen chant it from their box seats, the
street-boys whistle it with variations in the Bahnhofstrasse."

"That sounds like the Rothlied," said Saunders. "It is a revolutionary

air."

"I like it enormously," said Trafford.

"Of course you would," said Saunders. "You have the true Grimlander's
love of anarchy. But if you wish, we will subsequently adjourn to the Eden
Theatre of Varieties in the Karlstrasse. I am told that the Rothlied is being
sung there by a beautiful damsel of the aristocratic name of Schmitt."

"I have seen her posters," said Trafford, "and I should like, I confess, to
see the original. But what of Mrs. Saunders? Is the 'Eden' a respectable
place of entertainment?"

"It is an Eden of more Adams than Eves," said Mrs. Saunders. "No, I do
not propose to follow you into its smoky, beer-laden atmosphere. I am
going to accompany Frau generalin von Bilderbaum to the opera to hear 'La
Bohême.' But before I leave I want further enlightenment on the subject of
your toast. 'Wein' is all right, and 'Gesang' is all right, but what about
'Weib'? I thought you had sworn off the sex."

"Sworn off the sex!—Never! True, I offered to one individual my heart,

and hand, and soul; but the individual deemed the offering unsatisfactory. I
now offer to the whole female race what I once offered to one member of
it."

"Polygamist!" laughed Saunders.

 "No," explained Trafford, "it's a case of first come, first served."

"You are offering your heart and hand and soul to the first eligible
maiden who crosses your path?" asked Mrs. Saunders, with upraised brows.

"My heart and hand," corrected Trafford with great dignity.

"Come, come," Saunders broke forth, "it's time we were off!"

* * * * *

The auditorium of the Eden Theatre was a long oblong chamber, with a
crude scheme of decoration, and no scheme of ventilation worth speaking
about. It possessed, however, a good orchestra, an excellent brew of lager
beer, and usually presented a tolerably attractive show to the public of
Weidenbruck. For the sum of four kronen per head Saunders and Trafford
obtained the best seats in the building. For the expenditure of a further
trivial sum they obtained long tumblers of the world-famed tigerbräu.

"A promising show this," said Trafford, lighting a large cigar. An

exceedingly plump lady in magenta tights, was warbling a patriotic ditty to
the tune of "Won't you come home, Bill Bailey?"

"More quantity than quality," commented Saunders cynically.

"Personally,—not being possessed of your all-embracing enthusiasm for
womanhood at large,—I find myself looking forward to the next item on the
programme."

"What's that? The 'Rothlied'?"

"No. Midgets."

Trafford uttered an exclamation of disgust.

"Little things amuse little minds," he said rudely. "Give me a strong

man or a giant, and I will watch with interest."

At this point the curtain descended on the plump warbler, and a

powdered attendant in plush knickerbockers removed the number 7 from
the wings, and substituted the number 9.

"Oh, it isn't the midgets yet, after all," said Saunders, consulting his
programme. "It's the Schöne Fräulein Schmitt—the beautiful Miss Smith. I
wonder if she's as lovely as her posters."

As the curtain drew up again, a young girl tripped lightly on to the

middle of the stage, and it was at once manifest that the epithet "schone"
was no mere advertising euphemism.

Her black skirt was short, her black bodice low, and her black picture
hat exceedingly large, but her limbs were shapely, her eyes marvellously
bright though small, and there was a vivacity and grace in her movements
that put her predecessor to shame. When she sang, her voice proved to be a
singularly pure soprano, and,—what was more remarkable,—gave evidence
of considerable taste and sound training. The song was a dainty one, all
about a young lady called Nanette, who conquered all hearts till she met
someone who conquered hers. And then, of course, Nanette lost her art, as
well as her heart, and could make no impression on the only man who had
really touched the deeps of her poor little soul. The last verse, naturally, was
a tragedy,—the usual tragedy of the smiling face and the aching bosom. The
idea was not exactly a novel one, but the air was pretty, and the singer's
personality won a big success from the commonplace theme. Anyway, the
audience rose to her, and there was much clapping of hands, clinking of
beer glasses, and guttural exclamations of enthusiasm.

"Bravo!" cried Trafford ecstatically, "Bravo! Bravissimo! Behold an

artist among artistes, a fairy of the footlights! Bravo! Well done, beautiful
Miss Schmitt!"

"Charming," agreed Saunders more calmly, "and, strangely enough,

extraordinarily like a young lady I met a few years ago."

"Perhaps it is the young lady," suggested Trafford. "I noticed she fixed
her beady black eyes on you during the last verse."

"I think not," said Saunders drily. "The young lady I was referring to
was a somewhat more exalted personage than Fräulein Schmitt."
 The fascinating songstress re-appeared for her encore, and this time the
orchestra struck up a martial air with a good deal of rolling drums in it.

"My 'Gesang,'" whispered Trafford excitedly.

"The 'Rothlied,'" said Saunders.

Again the Fräulein sang, and now the burthen of her song was of
battlefields and war's alarms. The tune was vastly inspiriting, and the
audience knew it well, taking up the chorus with infectious enthusiasm.

"It's great!" muttered Trafford, twirling excitedly at his moustaches. "By

the living Jingo, it's great!"

And of a truth the air was an intoxicating one. There was gunpowder in
it, musketry and cold steel, reckless charges and stern movements of
advance. One caught the thunder of hoofs and the blare of bugles. Its
infection became imperious, maddening even,—for the audience forgot
their pipes and their tigerbräu, and beat time to the insistent rhythm, till the
chorus gave them a chance of imparting their enthusiasm to the roaring
refrain. The girl herself seemed the embodiment of martial ardour. She trod
the stage like a little war-horse, her eye sought the gallery and struck fire
from the beer-loving bourgeoisie. For a second her gaze seemed to fall upon
Saunders mockingly, and with an air of challenge. Then she glanced round
the crowded house, held it spellbound, lifted it up, carried it to high regions
of carnage, self-sacrifice, and glory. The audience roared, clapped,
screamed with exuberant acclaim. Their state was frénétique—no other
word, French, English, or German, well describes it.

"By George, she's a witch!" said Trafford. "She's as dangerous as a time

fuse. I'll be hanged if I don't want to fight someone!"

The encore verse was more pointed, more sinister, less general in its
application. It spoke of wrongs to be righted, tyranny to be overcome,
freedom to be gained. It hinted of an uplifting of the proletariat, of armed
citizens and frenzied women, of tumult in square and street; it breathed of
barricades and civic strife, the vast upheaval of a discontented people
determined to assert their rights. Men looked at each other and stirred
uneasily in their seats, and then glanced round in apprehension,—as if
expecting the entrance of the police. The song was a veritable
"Marseillaise," a trumpet call to revolution, a match in a barrel of
gunpowder; and with the final chorus and the stirring swing of the refrain,
all remnants of prudence and restraint were cast to the winds. The house
rose en masse; men mounted their seats and waved sticks and umbrellas
aloft; a party of young officers drew their swords and brandished them with
wild insurgent cries. Forbidden names were spoken, cheers were raised for
popular outlaws and suspects, groans for unpopular bureaucrats and the
King's favourites. It was an intoxicating moment,—whatever one's
sympathies might be,—and it was obvious enough that the temper of the
people was frankly revolutionary, and that the authorities would be quite
justified,—from their point of view,—in arresting the audience and the
management en bloc.

"We'd better clear out," suggested Saunders; "there's going to be

trouble."

"If there's a row," announced Trafford grimly, "I'm going to be in it.

You've seen stirring times over here before, but I'm a novice at it, and I
want blooding. Shall we raise three cheers for Karl and fight our way out?"

"Not if you want to keep your thick skull weather-proof," was the
sensible retort. "There's always discontent in Grimland, but there's a big sea
running just now, and it isn't wise to fight the elements. Sit tight, my friend,
and you'll live to see more exciting things than a noisy night at the Eden
Music-Hall."

The curtain was down again now, but the audience still roared for the re-
appearance of their favourite, still clamoured for another verse of the
intoxicating song.

"Hullo! what's this?" cried Trafford. An attendant had edged her way up
to Saunders, and was offering him a folded note on a tray. "If you have any
pleasant memories of the winter of 1904, come round to the stage door and
ask for Fräulein Schmitt." That was the purport of the note, and after
reading it, Saunders handed it to Trafford.
 "Then it must be your lady friend, after all," maintained the latter,
smiling at his friend.

"It must indeed," acquiesced Saunders with a frown. "Come round with
me now."

"Why not go by yourself?"

"Because I am a married man," replied Saunders, "and I want a

chaperon." And together the two men left the still noisy house and made
their way to the stage door.

Under the guidance of a pale youth in a shabby pony coat, they entered
a gloomy passage, ascended a steep flight of stone steps, and halted before a
door, which had once been painted green.

The pale one knocked, and a clear musical voice gave the necessary
permission to enter.

A naturally bare and ugly room had been rendered attractive by a big
stove, several comfortable chairs, and an abundance of photographs,
unframed sketches and artistic knick-knacks. It had been rendered still more
attractive by the presence of a charming young lady, who was engaged—
with the assistance of her dresser—in removing all traces of "make-up"
from her comely lips and cheeks.

The lady in question came forward with an air of pleasurable

excitement, and smiling a warm welcome to the Englishman, cried:

"So you have come, Herr Saunders! You have not, then, altogether
forgotten the winter of 1904?"

Saunders took the small hand which had been extended to him and
bowed low over it.

"Heaven forbid, my dear Princess—or must I call you Fräulein Schmitt,

now? No, indeed, so long as I have memory cells and the power to consult
them, I shall never forget the winter of 1904. It gave me an angel for a wife,
a king for a friend, and—must I say it—a princess for an enemy. That fierce
enmity! It is by no means my least pleasurable remembrance. There was so
much fun in it, such irresponsible laughter, that it all seems now more like
the struggle of children for a toy castle than anything else."

"Ah, but you forget that I lost a dear father and a loved brother in the
struggle for that toy castle!" There was almost a life-time of sorrow in the
young girl's voice.

Again Saunders bent his head.

"Pardon me, Princess," he said, "I did not forget that, nor the fact that
you nearly lost your life, and I mine. But my memory loves rather to linger
on the bob-sleighing excursions, the tea-fights at Frau Mengler's, the
frivolous disputations and serious frivolities—all with such a delicious
substratum of intrigue."

"You have a convenient memory, mein Herr," she said quietly. "You
remember the bright things, you half remember the grey, the black you
entirely forget."

Saunders' smile faded, for there was still a touch of sadness in the girl's
words. Under the circumstances it was not unnatural, but he thought it more
considerate to keep the interview from developing on serious lines.

"The art of living is to choose one's memories," he said lightly. "He who
has conquered his thoughts, has conquered a more wonderful country than
Grimland."

"And so marriage has made of you a philosopher, Herr Saunders?" she

returned, her soft lips curling a trifle contemptuously. "Well, perhaps you
are right—if we take life as a jest, death, then, is only the peal of laughter
that follows the jest." And then, turning to the American, she chided
Saunders with: "But you have not presented your friend!"

"I must again crave pardon—I had quite forgotten him," apologised
Saunders. "Your Highness, may I present my very good friend, Mr. George
Trafford of New York—the winner of the King's Cup."
 The American bowed low before this exquisite creature; then uplifting
his head and shoulders and twirling his moustache—a habit he had when
his emotions were at all stirred—he asked with true American directness:

"Am I speaking to a princess of the blood royal or to a princess of

song?"

The princess and the Englishman quickly exchanged amused glances,

and a moment later there came from the girl a ringing laugh, a delightful
laugh bubbling over with humour, with not a hint of the sorrow or the
bitterness of a few moments before, while Saunders hastened to say:

"Both, my American friend! You are addressing the high-born Princess

Gloria von Schattenberg, cousin to his Majesty King Karl of Grimland!"

"Then I congratulate the high-born princess less on her high birth than
on her inimitable gift of song," said the American gallantly.

The Princess acknowledged the felicitation with a bewitching smile.

"Thank you, Herr Trafford," she said simply. "It is better to be a music-
hall star in the ascendant than a princess in exile—it is far more profitable,
isn't it?" No answer was expected, and in a trice her mood changed again.
"When I fled the country three years ago, Herr Trafford," she continued, "I
was penniless—my father dead, and his estates confiscated. True, an
allowance—a mere pittance—might have been mine had I returned and
bowed the knee to Karl." She stopped, her feelings seemingly too much for
her; in a moment, however, she had mastered them. "But I was a
Schattenberg!" she cried, with a little toss of her head. "And the
Schattenbergs—as Herr Saunders will testify—are a stiff-necked race.
There was nothing to be done," she went on, "but develop the gifts God had
given me. Under an humble nom de guerre I have achieved notoriety and a
large salary. Germany, France, Belgium, I have toured them all—and my
incognito has never been pierced. So when I got hold of a splendid song I
lost no time in hastening to Weidenbruck, for I knew it would go like
wildfire here."
 "A most dangerous step." The comment came from the American, but
there was a light of frank admiration in his eye.

"Oh, no!" she protested, a faint touch of colour in her cheek, denoting
that his approving glance had not escaped her. "It is years since I was in this
place." And smiling at the Englishman, now, she added naïvely: "My
features are little likely to be recognised."

"Indeed!" voiced Saunders, a touch of satire in his tone. "Photographs of

the exiled Princess Gloria are in all the shop-windows, her personality is
more than a tolerably popular one. When they are placed in conjunction
with those of the equally popular Fräulein Schmitt, will not people talk?"

"I hope they will do more than that," confessed the Princess, growing
excited.

"You want——?"

"I want Grimland," interrupted the Princess; and added loftily: "nothing
more and nothing less. You will have me arrested?"

"Not yet!" declared Saunders with his brightest smile. "The night is cold
—your dressing-room is cosy. No, my fascinating, and revolutionary young
lady, the truce between us has been so long unbroken that I cannot rush into
hostilities in this way. Besides, we are not now in 1904, and——"

"Oh, for 1904!" cried the Princess, her eyes ablaze with the light of
enthusiasm. "Oh, for the sweets of popularity, the ecstasy of rousing brave
men and turning their blood to wine and their brains to fire! I want to live,
to rule, to be obeyed and loved as a queen!"

In an instant Trafford felt a responsive glow; he started to speak but

Saunders already was speaking.

"Princess," the Englishman was saying coldly, "popularity is champagne

with a dash of brandy in it. It is a splendid pick-me-up. It dispels ennui,
migraine, and all the other troubles of a highly-strung, nervous system.
Only, it is not what medical folk call a 'food.' It does not do for breakfast,
luncheon and dinner. After a time it sickens."

"Popularity—the adulation of my people would never pall on me,"

returned the Princess, gazing off for the moment, absorbed in a realm of
dreams.

"No, but the police might take a hand," intimated Saunders grimly.
"There is a castle at Weidenbruck called the Strafeburg. As its name
implies, it is intended otherwise than as a pleasure residence. It is a
picturesque old pile, but, curiously enough, the architect seems to have
neglected the important requirements of light and air. You would get very
tired of the Strafeburg, my Princess!"

"The people of Paris got very tired of the Bastille," retorted the Princess
hotly and flashing a defiant look at the Englishman. Trafford's hand
clinched in sympathy for her. Never was maid so splendidly daring and
reckless and fascinating! "They got very tired of Louis XVI.," the voice was
still going on, "and the people of Weidenbruck are very tired of the
Strafeburg."

To Trafford's astonishment the Princess's eyes showed danger of filling

upon uttering these last words. Her perfect mouth quivered, and of a
sudden, she seemed to him younger—certainly not more than nineteen.
Again he was tempted to interfere in her behalf, but again Saunders was
before him.

"They got tired of a good many people in Paris," the Englishman said
slowly. "Ultimately, even of Mére Guillotine. But supposing this country
rose, pulled down the Strafeburg and other interesting relics, and
decapitated my excellent friend, the King; supposing after much cutting of
throats, burning of buildings, and shootings against the wall, a certain
young lady became Gloria the First of Grimland, do you imagine she would
be happy? No—in twelve months she would be bored to death with court
etiquette, with conflicting advice, and the servile flattery of interested
intriguers. Believe me, she is far happier enchanting the audiences of
Belgium and Germany than she would be in velvet and ermine and a gold
crown that fell off every time she indulged in one of her irresponsible fits of
merriment."

"I might forget to laugh," said the Princess sadly. "But no, I cannot, will
not, take your advice! Do you not suppose that nature intended me to fill a
loftier position than even the high firmament of the Café Chantant? No, a
thousand times no, Herr Saunders—I am a Schattenberg and I mean to
fight!"

The American could not restrain himself an instant longer.

"Bravo!" burst out Trafford enthusiastically. "There's a ring in that

statement that warms my heart tremendously!"

A swift frown clouded Saunders' brow. It was plain to see that the
Englishman was much annoyed at the American's outspoken approval of the
Princess's purpose; but she broke into the laughter of a mischief-loving
child.

"And you—are not you a friend of King Karl?" she inquired of Trafford,
while a new light shone in her eyes.

The American gave a furious twist to his moustache before answering.

"Mrs. Saunders, I believe, has recommended me as his Commander-in-

Chief," he said with mock gravity, "but the appointment has not yet been
confirmed. 'Till then my services are at the disposal of the highest bidder."

"My American friend's services are of problematic value," put in

Saunders, recovering his temper. "He is an excellent skater, but a
questionable general. He has had an exciting day and a superb dinner. With
your permission I will take him back to his bed at the Hôtel Concordia."

The Princess had not taken her eyes off of the American since he had
last spoken.

"He has energy," she mused, looking into space now, "also the capacity
for inspiring enthusiasm, and I am not at all sure that he has not the instinct
of a born tactician."

"But I am," Saunders broke in bluntly. "Princess, we have the honour of

wishing you good-night!"

The Princess laid a delicate hand on the Englishman's arm.

"Herr Saunders," she said, "I will ask you to see me home."

Saunders shook his head.

"You must excuse me," he said. "To-night, I am neutral, but neutral

only. I am the King's guest and must not aid the King's enemies."

"Good loyal man!" exclaimed the Princess. "Plus royalist que le roi!"
And then turning to the American: "And Herr Trafford? He will not refuse
to perform a small act of courtesy?"

"Trafford accompanies me!" declared Saunders firmly.

"I'm hanged if he does!" spoke up Trafford. "The lady wants to be seen

home—and I'm going to do it if I swing for it!"