Question 1

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 can lead to an inefficient allocation of resources. Prices are signals that help allocate resources to their most highly valued uses, and when prices are fixed above or below their equilibrium level, resources may not be allocated efficiently.

Question 2

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

Accepted Answer

The invisible hand, which refers to the self-regulating nature of the market, is not perfect and can lead to market failures such as externalities, monopoly power, and information asymmetry. These market failures require government intervention to ensure market efficiency and promote the public good. Therefore, even in a market economy, government intervention is necessary to address market failures and promote economic welfare.

Question 3

Public policies

Accepted Answer

Public policies can be designed in such a way that they improve economic efficiency, for example by reducing market failures or increasing competition. At the same time, some policies can also improve equality, for example by redistributing income or providing universal access to healthcare and education. However, it is often difficult to achieve both goals simultaneously, as there may be trade-offs between efficiency and equality. Therefore, policymakers must carefully consider the costs and benefits of different policy options and strike a balance between these two objectives.

Question 4

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 5

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 are based on the interaction of supply and demand, which takes into account both the value of a good to society (as reflected in the willingness of consumers to pay for it) and the cost of making it (as reflected in the willingness of producers to supply it). Government-determined prices, on the other hand, are often based on political considerations and may not take into account these market forces.

Question 6

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

Accepted Answer

When the government intervenes in the economy to promote efficiency, the main goal is to enlarge the economic pie, which means increasing the overall output of goods and services in the economy. By promoting efficiency, the government aims to ensure that resources are allocated in the most productive way possible, which can lead to increased economic growth and prosperity. While the other options listed may be desirable outcomes of government intervention, they are not necessarily the primary goal when promoting efficiency.

Question 7

Prices direct economic activity in a market economy by

Accepted Answer

Prices influence the actions of both buyers and sellers in a market economy. When prices are high, buyers may reduce their purchases or seek out cheaper substitutes, while sellers may increase production or introduce new products to take advantage of the higher prices. Conversely, when prices are low, buyers may increase their purchases or upgrade to higher-quality goods, while sellers may reduce production or shift to alternative markets where prices are higher. Thus, prices play a critical role in coordinating the behavior of participants in a market economy and determining the allocation of resources.

Question 8

Which of the following can lead to market failure?

Accepted Answer

Externalities occur when the actions of one agent affect the welfare of others without being reflected in market prices, leading to inefficient outcomes. Market power occurs when a single agent or a small group of agents has the ability to influence market prices, leading to inefficient outcomes. Both externalities and market power can lead to market failure. Options B, C, and D do not include both externalities and market power, which are both potential sources of market failure.

Question 9

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

Accepted Answer

Well-designed public policy can enhance economic efficiency for both externalities and market power. In the case of externalities, policies like taxes or subsidies can help internalize the external costs or benefits and encourage efficient behavior. In the case of market power, policies like antitrust regulations or price controls can prevent abuse of market power and promote fair competition, leading to more efficient outcomes.

Question 10

The term market failure refers to

Accepted Answer

Market failure occurs when the market is unable to allocate resources efficiently. This can happen due to various reasons such as externalities, incomplete information, public goods, and natural monopolies. It is a situation where the market fails to achieve pareto efficiency, which means that it is not possible to make anyone better off without making someone else worse off. Options B, C, and D are not related to the concept of market failure.

Question 11

A rationale for government involvement in a market economy is

Accepted Answer

All of the choices listed are rationales for government involvement in a market economy. Governments may need to intervene to ensure that markets are producing a fair distribution of economic well-being, a socially optimal allocation of resources, and that property rights are being enforced.

Question 12

The government enforces property rights by

Accepted Answer

Providing police and courts is the most direct and effective way for the government to enforce property rights. This allows property owners to rely on the government to protect their property from theft or damage, and to seek legal recourse if their property rights are violated. Property taxes and public parks may be related to property ownership, but they are not the primary means of enforcing property rights. Forcing people to own property is not a common practice in most jurisdictions.

Question 13

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 too many potential customers bought illegally-produced copies of the software instead of buying the product directly from the company suggests that there was inadequate enforcement of property rights. If property rights were adequately enforced, there would be a lower incidence of piracy, and companies would not lose out on potential sales as a result.

Question 14

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 not generally regarded as a legitimate reason for the government to intervene in a market by economists because it often leads to inefficiencies, such as higher prices for consumers, and can ultimately harm the domestic industry in the long run by reducing incentives for innovation and competitiveness.

Question 15

Which of the following could reduce economic efficiency?

Accepted Answer

All of the choices listed could potentially reduce economic efficiency. Laws that encourage lawsuits can lead to increased litigation costs and slower dispute resolution, which can be a drag on economic activity. Policies that redistribute income can create disincentives for work and investment, reducing economic growth potential. Significant restrictions on international trade can limit access to global markets and resources, reducing the potential for economies of scale and specialization.

Question 16

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

Accepted Answer

Market failure refers to a situation in which markets fail to allocate resources efficiently, either by underproducing or overproducing goods and services. This can occur due to externalities, public goods, imperfect competition, and asymmetric information, among other factors. When market failure occurs, government intervention may be necessary to correct the inefficiency and ensure a more economically efficient outcome. The other options are incorrect because they do not describe this concept accurately.

Question 17

Causes of market failure include

Accepted Answer

Externalities, which occur when the actions of one party have an impact on the welfare of third parties, and market power, which occurs when a single buyer or seller has significant influence over the market price, are two common causes of market failure. Incorrect forecasts of consumer demand and foreign competition may affect the market, but they do not necessarily lead to market failure.

Question 18

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 19

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

Accepted Answer

If rent prices were fixed below the current price, it would become more affordable for people to rent apartments in NYC. This would likely result in an increase in demand and more people wanting to rent apartments in the city.

Question 20

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...

Quiz 1: Ten Principles of Economics