Question 1

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

Accepted Answer

If the rent for apartments in New York City were fixed below the current price, it would become more affordable for people, which would increase the number of people wanting to rent apartments in New York City.

Question 2

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

Accepted Answer

Market failure occurs when the market economy fails to allocate resources efficiently. This can be due to externalities, public goods, market power, or incomplete information.

Question 3

Market failure can be caused by

Accepted Answer

Market failure can occur due to externalities, which are costs or benefits of a transaction that affect third parties and are not reflected in the market price. Additionally, market power can result in inefficient production and pricing decisions that do not reflect supply and demand. Low consumer demand, equilibrium prices, high prices, and foreign competition are not necessarily indicative of market failure.

Question 4

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

Accepted Answer

The invisible hand, while effective in allocating resources efficiently in a market economy, is not perfect and can lead to market failures such as externalities, public goods, and monopolies. Therefore, there is a need for government intervention to correct these market failures and ensure a fair and efficient functioning market economy. Choice A is incorrect because government intervention can help prevent excessive market power and promote competition. Choice B is incorrect because property rights are important for the functioning of a market economy, and government can help protect them.

Question 5

Causes of market failure include

Accepted Answer

Market failure occurs when there is an inefficient allocation of resources in a market. Externalities (costs or benefits of production or consumption that are not reflected in prices) and market power (the ability of a firm to control prices or output) are both sources of market failure. Incorrect forecasts of consumer demand and foreign competition may lead to market inefficiencies but are not necessarily causes of market failure in and of themselves.

Question 6

Public policies

Accepted Answer

Public policies may be designed to improve economic efficiency by promoting market competition, reducing inefficiencies, or encouraging innovation. Alternatively, they may be designed to improve equality by providing goods and services to those who are economically disadvantaged or implementing redistributive policies. However, it is often difficult to simultaneously achieve both economic efficiency and equality, as policies that address one goal may undermine the other.

Question 7

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 usually not considered a legitimate reason for government intervention in a market because it can lead to inefficiencies and distortions in the market. Instead, economists generally advocate for free trade and open competition to promote efficiency and foster innovation in industries. The other options, promoting efficiency, promoting equality, and enforcing property rights, are all legitimate reasons for government intervention in a market.

Question 8

The term market failure refers to

Accepted Answer

Market failure refers to a situation in which the market fails to allocate resources efficiently. This could happen due to various reasons such as externalities, incomplete information, public goods, and market power. An unsuccessful advertising campaign, ruthless competition among firms, and a firm forced out of business due to losses are not examples of market failure.

Question 9

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 directly from the company indicates that property rights were not adequately enforced. This means that the company was unable to protect its intellectual property, leading to lost sales and ultimately, going out of business.

Question 10

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 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

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

Accepted Answer

Public policy can enhance economic efficiency for both externalities and market power. Externalities such as pollution or congestion can be addressed through policies such as taxes or permits. Market power, such as monopolies, can be regulated through antitrust laws or price controls. By addressing these market failures, the market can become more efficient and produce outcomes closer to the socially optimal level.

Question 13

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

Accepted Answer

The government intervenes in the economy to promote efficiency by trying to enlarge the economic pie, which means to increase the size of the economy and its output. By doing so, there can be more resources available to redistribute for a fair distribution of income or to change the way in which the economic pie is divided. Therefore, option C is the best choice.

Question 14

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

Accepted Answer

Allowing prices to freely adjust to supply and demand is essential for the efficient allocation of resources. When the government interferes and prevents those adjustments, it can result in inefficient allocation of resources.

Answer: D 
 Preventing prices from adjusting naturally can have some benefits for efficiency, such as maintaining prices at a level that encourages production, but it can also lead to reduced equality, as some individuals or groups may be favored or disadvantaged by these interventions.

Question 15

Which of the following can lead to market failure?

Accepted Answer

Both externalities and market power can lead to market failure. Externalities occur when the production or consumption of a good or service has an impact on third parties who are not involved in the transaction. This can result in overproduction or underproduction of the good or service, and therefore a market failure. Market power refers to the ability of a firm or group of firms to influence the market price of a good or service. This can result in a lack of competition and inefficient allocation of resources, leading to a market failure.

Question 16

The government enforces property rights by

Accepted Answer

Providing police and courts is the most direct way that the government enforces property rights. The police protect private property from theft or damage, and the courts system allows property owners to seek legal recourse if their property rights are violated. Property taxes may indirectly support the enforcement of property rights but are not necessarily a direct measure. Forcing people to own property would be counterproductive to property rights since it would infringe upon people's freedom to choose whether or not to own property. Public parks and recreation facilities are not directly related to property rights enforcement.

Question 17

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 18

Which of the following could reduce economic efficiency?

Accepted Answer

A) Laws that encourage lawsuits can increase transaction costs and decrease productivity, reducing economic efficiency.
B) Policies that redistribute income can decrease incentives for individuals to work hard and innovate, reducing economic efficiency.
C) Policies that impose significant restrictions on international trade can reduce the gains from comparative advantage and specialization, reducing economic efficiency. 
Therefore, all of the above options can reduce economic efficiency.

Question 19

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 better because they reflect both the value of a good to society and the cost of making it. Market competition ensures that firms are incentivized to minimize costs while still satisfying consumer demand, leading to an efficient allocation of resources and an equilibrium price that reflects the balance between supply and demand. In contrast, government-determined prices may not accurately reflect either the true value or cost of a good, leading to inefficiencies and potentially unintended consequences.

Question 20

A rationale for government involvement in a market economy is

Accepted Answer

Government involvement in a market economy is justified by all of the reasons provided in the options (A, B, and C). Markets sometimes fail to produce a fair distribution of economic well-being, sometimes fail to produce an efficient allocation of resources, and property rights have to be enforced. Therefore, government intervention is needed to address such market imperfections and ensure the smooth and fair operation of the economy.

Quiz 1: Ten Principles of Economics