Question 1

The invisible hand ensures that economic prosperity is distributed equally.

Accepted Answer

The invisible hand of the market refers to the self-regulating nature of the market. However, this does not necessarily mean that economic prosperity is distributed equally. In fact, depending on the market conditions and various other factors, economic prosperity can be distributed unequally among individuals and groups.

Question 2

The government can potentially improve market outcomes if market inequalities or market failure exists.

Accepted Answer

Government interventions such as taxation, regulation, and public goods provision can address market failures such as externalities, information asymmetry, and public goods under-provision, and reduce market inequalities such as income and wealth gaps.

Question 3

Trade can make everyone better off except in the case where one person is better at doing everything.

Accepted Answer

Trade can still benefit both parties even if one person is better at everything due to the principle of comparative advantage. This means that even if one person is better at everything, they can still specialize in the area where they have the greatest advantage and trade with someone who has a comparative advantage in another area. This way, both parties can benefit from trade and increase their overall well-being.

Question 4

Market failure refers to a situation in which the market does not allocate resources efficiently.

Accepted Answer

Market failure occurs when the market fails to allocate resources efficiently, leading to a net welfare loss for society. This can happen due to reasons such as externalities, public goods, information asymmetry, and market power.

Question 5

Market power and externalities are two possible causes of market failure.

Accepted Answer

Market power refers to the ability of a firm or a group of firms to influence the market price by controlling the supply of a particular product. This can result in a distorted allocation of resources and a reduction in consumer welfare, leading to market failure. Externalities refer to the impact of an economic activity on third parties who are not directly involved in the exchange. This can result in either positive or negative externalities that are not reflected in the market price, leading to a suboptimal allocation of resources and market failure. Therefore, both market power and externalities are possible causes of market failure.

Question 6

Productivity is defined as the quantity of goods and services produced from each unit of labor input.

Accepted Answer

This is the definition of productivity, as it measures the efficiency of labor in producing goods and services.

Question 7

The fact that people are willing to pay much more for a diamond,which is not needed for survival,than they are willing to pay for a cup of water,which is needed for survival,is an example of irrational behavior.

Accepted Answer

This phenomenon is explained by the concepts of marginal utility and scarcity. Diamonds are scarce and have a high marginal utility for some people, making them willing to pay more. Water, while essential for survival, is generally abundant and has a lower marginal utility, hence the lower price. This behavior is rational within the framework of economic theory.

Question 8

To say people respond to incentives means that people may alter their decisions when the costs and benefits of an action change.

Accepted Answer

When the costs and benefits of an action change, people may alter their decisions or behavior. Incentives can either encourage or discourage certain actions or behaviors, as people respond to the rewards or punishments associated with them.

Question 9

Communist countries worked on the premise that government officials were in the best position to allocate the economy's scarce resources.

Accepted Answer

Communist countries operated under a planned economy, in which government officials controlled the allocation of resources.

Question 10

Trade allows each person to specialize in the activities he or she does best,thus increasing each individual's productivity.

Accepted Answer

Trade allows individuals to focus on their strengths and specialize in their activities, leading to higher productivity and efficiency.

Question 11

A tax on gasoline is an incentive that encourages people to drive smaller more fuel-efficient cars.

Accepted Answer

A tax on gasoline makes it more expensive to drive, which can encourage people to choose smaller cars that use less fuel, ultimately saving money in the long run.

Question 12

Trade with any nation can be mutually beneficial.

Accepted Answer

Trade allows nations to specialize in producing goods that they are efficient at producing and import goods that they are less efficient at producing. This can result in lower prices for consumers and increased profits for businesses, leading to economic growth for both trading partners.

Question 13

Suppose one county in Missouri decides it wants to reduce alcohol consumption,so the county passes a law that raises the price of a bottle of beer by $1.As a result,people drive to other counties to drink alcohol,which results in an increase in drunk driving.This illustrates the principle that people respond to incentives.

Accepted Answer

This scenario demonstrates the principle that people respond to incentives. By raising the price of beer in one county, drinkers are incentivized to go to neighboring counties to consume alcohol, leading to increased drunk driving incidents.

Question 14

One way that governments can improve market outcomes is to ensure that individuals are able to own and exercise control over their scarce resources.

Accepted Answer

When individuals are able to own and exercise control over their scarce resources, they are better incentivized to use them efficiently and effectively. This can lead to improved market outcomes, as resources are allocated to their most productive uses. Government policies that protect property rights, enforce contracts, and promote entrepreneurship can help facilitate individual ownership and control over resources, contributing to improved market outcomes.

Question 15

A market economy cannot produce a socially desirable outcome because individuals are motivated by their own selfish interests.

Accepted Answer

While individuals in a market economy are indeed motivated by their own self-interest, the competition and incentives within the market can lead to socially desirable outcomes. For example, if there is a high demand for environmentally sustainable products, businesses may start producing them in order to attract customers and increase profits. Additionally, government regulations and policies can also help ensure that markets function in a way that benefits society as a whole.

Question 16

A rational decisionmaker takes an action if and only if the marginal cost exceeds the marginal benefit.

Accepted Answer

A rational decisionmaker takes an action if and only if the marginal benefit exceeds the marginal cost.

Question 17

One of the effects of gas prices rising from about $2 to about $4 per gallon was airlines ordering new,fuel-efficient aircraft.

Accepted Answer

With rising gas prices, airlines faced increased operating costs, prompting them to seek ways to improve fuel efficiency. One of the ways they did this was by ordering new, more fuel-efficient aircraft.

Question 18

Inflation increases the value of money.

Accepted Answer

Inflation decreases the value of money over time. As prices of goods and services rise, the purchasing power of money decreases, meaning that the same amount of money can buy less than before.

Question 19

Inflation is the primary determinant of a country's living standards.

Accepted Answer

While inflation can have an impact on a country's living standards, there are many other factors that also play a role, such as economic growth, employment levels, income distribution, social policies, and access to education and healthcare, among others. Therefore, it is not accurate to say that inflation is the primary determinant of a country's living standards.

Question 20

Market failure occurs when no individual has the ability to substantially influence market prices.

Accepted Answer

Market failure occurs when there is an inefficient allocation of goods and services in a market due to factors such as externalities, monopolies, information asymmetry, public goods, and lack of competition. In such cases, individuals or entities may have significant influence on market prices, leading to an inefficient outcome.

Quiz 1: Ten Principles of Economics: Part B