Question 1

The government enforces property rights by

Accepted Answer

Property rights are enforced by providing police and courts to protect individuals' assets and prevent theft or damage to property. Property taxes, public parks, and forcing people to own property are not directly related to enforcing property rights.

Question 2

A company that formerly produced software went out of business because too many potential customers bought illegally-produced copies of the software instead of buying the product directly from the company.This instance serves as an example of

Accepted Answer

The fact that the company went out of business due to the prevalence of illegal copies indicates that property rights were not adequately enforced. Customers were able to obtain and use the software without paying the company for the rights to do so, ultimately leading to the company's demise.

Question 3

The term market failure refers to

Accepted Answer

Market failure occurs when the free market fails to allocate resources in an efficient way, resulting in an inefficient allocation of resources or an inefficient distribution of goods and services. This can happen due to a variety of reasons, including externalities, public goods, market power, and information asymmetry. Choice B, C, and D do not accurately describe market failure.

Question 4

A rationale for government involvement in a market economy is

Accepted Answer

All of the given choices are valid rationales for government involvement in a market economy. Market failures may occur due to externalities, natural monopolies, information asymmetry, and public goods. Government intervention can correct such failures and help achieve efficient allocation of resources. Additionally, the enforcement of property rights is crucial for creating a conducive environment for economic transactions to take place. Thus, government involvement is necessary for promoting fairness, efficiency, and protection of property rights in a market economy.

Question 5

If the price of a dozen eggs were fixed above the current price,then we would expect

Accepted Answer

The answer of If the price of a dozen eggs...

Question 6

If the price of visiting a doctor were fixed below the current price,then we would expect

Accepted Answer

The answer of If the price of visiting a doctor...

Question 7

If the rent for apartments in New York City were fixed below the current price,then we would expect

Accepted Answer

Fixed rent below the current price will attract more people who can now afford to rent an apartment in NYC, leading to an increase in the number of people wanting to rent apartments.

Question 8

To say that government intervenes in the economy to promote efficiency is to say that government is attempting to

Accepted Answer

When government intervenes in the economy to promote efficiency, it is attempting to enlarge the economic pie. This means that it aims to make the economy more productive and generate more output, leading to overall economic growth. While a more fair distribution of income and changing the way in which the economic pie is divided may be indirect outcomes of promoting efficiency, they are not the primary goal.

Question 9

For which of the following problems can well-designed public policy enhance economic efficiency?

Accepted Answer

Well-designed public policies such as taxes and subsidies can help address externalities by internalizing the costs or benefits of a particular activity. Similarly, policies such as antitrust laws can help mitigate the negative effects of market power and promote competition, leading to more efficient allocation of resources. Therefore, both externalities and market power can be enhanced with well-designed public policy.

Question 10

Causes of market failure include

Accepted Answer

Market failure occurs when the market does not allocate resources efficiently. Externalities occur when the production or consumption of a good affects an unrelated third party, leading to a market failure. Market power also leads to a market failure as it allows firms to exert their influence over price and production levels, resulting in an inefficient allocation of resources. The other options, incorrect forecasts of consumer demand and foreign competition, do not necessarily lead to market failure on their own.

Question 11

If the wage for unskilled labor were fixed above the current wage,then we would expect

Accepted Answer

The answer of If the wage for unskilled labor were...

Question 12

Public policies

Accepted Answer

Public policies can be designed to promote economic efficiency, such as reducing barriers to entry or promoting competition, or to promote equality, such as implementing progressive taxation or providing social safety nets. However, it is often difficult to achieve both simultaneously. Some policies that promote equality, like minimum wage laws or protective tariffs, may harm economic efficiency by discouraging growth or innovation. Conversely, some policies that promote economic efficiency, like deregulation or tax cuts for the wealthy, may exacerbate inequality. Therefore, public policies can improve either economic efficiency or equality, but may not be able to improve both simultaneously.

Question 13

A friend of yours asks you why market prices are better than government-determined prices.Because you understand economic principles,you say that market-determined prices are better because they generally reflect

Accepted Answer

Market-determined prices take into account both the value of a good to society and the cost of making it. This is because in a competitive market, prices are determined by the interaction of supply and demand, which reflects both the willingness of consumers to pay for a good (its value) and the willingness of firms to produce it (its cost). Government-determined prices, on the other hand, may be biased towards certain groups or may not reflect the true costs and benefits of a good due to political pressures.

Question 14

Which of the following could reduce economic efficiency?

Accepted Answer

All of the options provided could reduce economic efficiency. 
A) Laws that encourage lawsuits can result in higher transaction costs and may discourage businesses from expanding or innovating. 
B) Policies that redistribute income can create disincentives to work and potentially result in a less efficient allocation of resources. 
C) Policies that impose significant restrictions on international trade can limit access to cheaper inputs and markets, resulting in increased costs and reduced efficiency.

Question 15

When the government prevents prices from adjusting naturally to supply and demand,

Accepted Answer

When the government prevents prices from adjusting naturally to supply and demand, it creates market inefficiencies which adversely affects the allocation of resources. This is because prices act as signals for both buyers and sellers, guiding them to make decisions based on changes in supply and demand. By preventing prices from changing, the government distorts these signals and creates market inefficiencies. Therefore, B is the correct answer. Choices A, C, and D are incorrect as they do not accurately describe the effects of preventing prices from adjusting naturally to supply and demand.

Question 16

Prices direct economic activity in a market economy by

Accepted Answer

Prices act as signals that influence the decisions of buyers and sellers. When the price of a good or service increases, producers are incentivized to increase supply, and consumers are incentivized to seek alternatives or reduce consumption. Conversely, when prices decrease, producers may reduce supply, and consumers may increase their demand. This dynamic allocation of resources is one of the key features of a market economy.

Question 17

Which of the following can lead to market failure?

Accepted Answer

Externalities and market power can both lead to market failure. Externalities occur when the actions of one party have an impact on others who are not involved in the transaction, leading to a misallocation of resources. Market power occurs when a single entity or group has the ability to influence prices in the market, which can lead to reduced competition and a lack of efficiency.

Question 18

The term used to describe a situation in which markets do not allocate resources efficiently is

Accepted Answer

Market failure is a situation where markets do not allocate resources efficiently, leading to an inefficient allocation of resources and an overall decrease in economic welfare. In cases of market failure, the government may need to intervene to mitigate the negative effects and restore efficiency. Economic meltdown refers to a complete collapse of the economy, while equilibrium and the invisible hand refer to concepts related to efficient market outcomes.

Question 19

One reason we need government,even in a market economy,is that

Accepted Answer

The invisible hand, while a powerful force in guiding market outcomes, is not perfect and can lead to market failures such as externalities or public goods. Government intervention can help correct these market failures and promote efficiency and fairness in the economy. Option A is incorrect because government intervention can actually create market power through regulations and subsidies. Option B is incorrect because property rights are essential for the functioning of a market economy and government intervention should aim to protect property rights rather than weaken them.

Question 20

Which of the following is not generally regarded by economists as a legitimate reason for the government to intervene in a market?

Accepted Answer

Protecting an industry from foreign competition is generally not seen as a legitimate reason for government intervention in a market according to standard economic principles. This is because such intervention can lead to market inefficiencies and increase consumer prices.

Quiz 1: Ten Principles of Economics