Question 1

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 tend to reflect both the value of a good to society and the cost of making it. In a competitive market, the price of a good or service is set at the point where the quantity demanded equals the quantity supplied, which takes into account both the demand for the good or service (reflected in its value to society) and the supply of the good or service (reflected in the cost of making it). By contrast, government-determined prices may be subject to political considerations and may not reflect the true value or cost of the good or service.

Question 2

In a market economy, who makes the decisions that guide most economic activity?

Accepted Answer

In a market economy, both firms and households make decisions that guide most economic activity. Firms determine what goods and services to produce, how much to produce, and at what price to sell them. Meanwhile, households decide which goods and services to purchase based on their preferences and budget constraints. The government may play a role in regulating certain aspects of the market, but overall it is the actions of firms and households that determine the direction of the economy.

Question 3

When the "invisible hand" guides economic activity, prices of products reflect

Accepted Answer

The invisible hand guides economic activity through the forces of supply and demand, with prices being determined by the interaction of buyers and sellers in the market. Prices reflect both the values that society places on those products (reflected in the willingness of consumers to pay for them) and the costs to society of producing those products (reflected in the amount that producers are willing to sell them for). This is because in a free market, consumers and producers make their own decisions based on their own self-interest, but their actions are ultimately guided by the workings of the market as a whole. The government does not typically set prices in a free market economy.

Question 4

If the government were to intervene and set a wage for unskilled labor above the market wage, then we would expect, relative to the market outcome,

Accepted Answer

Setting a wage for unskilled labor above the market wage will increase the cost of hiring unskilled labor for employers. This will lead to a decrease in the number of unskilled jobs available as employers will not be willing to pay the higher wage for as many workers.

Question 5

The decisions of firms and households are guided by prices and self-interest in a

Accepted Answer

In a market economy, the decisions of firms and households are guided by prices and self-interest. A command economy and centrally-planned economy rely on government or central authority to make economic decisions, rather than allowing individuals and firms to make choices based on prices and self-interest. Therefore, choices A and B are incorrect.

Question 6

In a market economy, economic activity is guided by

Accepted Answer

In a market economy, economic activity is guided by prices and self-interest because individuals and businesses make decisions based on their own self-interest and the prices set by the market. This leads to competition and incentives for individuals and businesses to produce goods and services that meet the demands of consumers. The government and central planners do not typically play a significant role in guiding economic activity under a market economy. Large businesses may be influential in some industries, but they ultimately still respond to market signals and consumer demand.

Question 7

If the government were to intervene and set the price of a dozen eggs above the market price, then we would expect, relative to the market outcome,

Accepted Answer

When the government intervenes and sets the price of a dozen eggs above the market price, this creates a surplus of eggs because farmers will want to increase production to take advantage of the higher price, but consumers will want to buy fewer eggs at the higher price. In other words, farmers will want to sell more eggs than consumers are willing to buy at that price. This excess supply will lead to a decrease in the price of eggs in the long run.

Question 8

For markets to work well, there must be

Accepted Answer

Property rights are essential for markets to function properly because they allow individuals and businesses to own, use, and exchange goods and services. This creates incentives for people to produce and exchange goods and services that meet the needs and wants of others, resulting in efficient allocation of resources and economic growth. Market power, a central planner, and abundant resources are not necessary for markets to work well.

Question 9

Prices usually reflect

Accepted Answer

Prices are determined by both the value of a good to society, as reflected in consumers' willingness to pay, and the cost to society of producing the good, as reflected in the producer's costs. Therefore, prices reflect both the value and the cost of a good.

Question 10

According to Adam Smith, the success of decentralized market economies is primarily due to

Accepted Answer

According to Adam Smith, the success of decentralized market economies is primarily due to individuals' pursuit of self-interest, which he believed would lead to greater production, innovation, and overall economic growth. Smith argued that by pursuing their own interests, individuals inadvertently benefit society as a whole through the invisible hand of the market. Smith did recognize the importance of a legal system in enforcing contracts and protecting property rights, but ultimately saw self-interest as the driving force behind economic success.

Question 11

In an economy in which decisions are guided by prices and individual self-interest, there is

Accepted Answer

In a market economy, prices act as signals that guide producers and consumers to make decisions that ultimately lead to efficient production. This is because producers will only produce goods and services that are in demand, and consumers will only purchase goods and services that provide value to them. This aligns the self-interest of producers and consumers with the overall efficiency of the economy. While government intervention may be necessary in certain cases, such as to correct market failures or provide public goods, the overall efficiency of the economy is largely achieved through the market system.

Question 12

In a market economy,

Accepted Answer

In a market economy, both households and firms make decisions that determine the production and consumption of goods and services. Households decide which firms to work for and what to buy with their incomes, while firms determine whom to hire and what to make based on consumer demand and profitability. There is no central planner in a market economy.

Question 13

Prices direct economic activity in a market economy by

Accepted Answer

Prices in a market economy act as signals that influence the actions of buyers and sellers. Higher prices encourage producers to supply more goods and services, while lower prices discourage production and encourage consumers to buy more. This interplay of supply and demand based on prices ultimately determines the quantity of goods and services produced and consumed in the economy.

Question 14

If the government were to intervene and set the rent for apartments in New York City below the market rent, then we would expect, relative to the market outcome,

Accepted Answer

The answer of If the government were to intervene and...

Question 15

Which of the following statements about market economies is correct?

Accepted Answer

The answer of Which of the following statements about market...

Question 16

If the government were to intervene in a market economy and fix the price of visiting a health care provider below the market price, then we would expect, relative to the market outcome,

Accepted Answer

When the government sets a price ceiling on health care visits, the price paid by patients will be lower than the equilibrium price. This lower price will increase the quantity demanded of health care visits, which will lead to more visits people want to make. At the same time, the lower price will decrease the quantity supplied of health care visits, which will lead to fewer visits health care providers want to provide. Therefore, we would expect an increase in the number of visits people want to make and a decrease in the number of visits health care providers want to provide, which is option B.

Question 17

The self-interest of the participants in an economy is guided into promoting general economic self-interest by

Accepted Answer

The invisible hand is the concept that the self-interest of individuals in an economy will naturally guide them towards promoting the general economic self-interest. Essentially, individuals pursuing their own self-interest in a competitive market will lead to outcomes that benefit the economy as a whole.

Question 18

The "invisible hand" works to promote general well­being in the economy primarily through

Accepted Answer

The "invisible hand" refers to the idea that the pursuit of self-interest by individuals in the market leads to overall economic prosperity and well-being. This is because as individuals pursue their own goals, they create goods and services that others demand, leading to economic growth and higher standards of living for all. Government intervention or the political process may have some impact, but they are not the primary drivers of economic prosperity under the invisible hand theory. Similarly, while altruism can play a role in individual decision-making, it is the pursuit of self-interest that is the guiding force of the invisible hand.

Question 19

Which of the following statements does not apply to a market economy?

Accepted Answer

A market economy is characterized by decentralized decision-making, where firms and households make decisions based on their individual interests and incentives. Government policies are not the primary force that guides these decisions in a market economy.

Question 20

In a market economy, economic activity is guided by

Accepted Answer

In a market economy, economic activity is guided by self-interest and prices. The allocation of resources and the determination of goods and services produced are based on the decisions of individual producers and consumers in response to market signals, such as the interplay of supply and demand. The government does have a role in providing necessary regulations and infrastructure, but it does not set prices or direct economic activity. Corporations may be important players in the market, but they are also guided by self-interest and the signals of the market. Central planners, on the other hand, make decisions about economic activity based on their own goals and priorities, rather than allowing individuals to make choices based on their own needs and preferences.

Quiz 1: Ten Principles of Economics

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

In a market economy, who makes the decisions that guide most economic activity?

When the "invisible hand" guides economic activity, prices of products reflect

If the government were to intervene and set a wage for unskilled labor above the market wage, then we would expect, relative to the market outcome,

The decisions of firms and households are guided by prices and self-interest in a

In a market economy, economic activity is guided by

If the government were to intervene and set the price of a dozen eggs above the market price, then we would expect, relative to the market outcome,

For markets to work well, there must be

Prices usually reflect

According to Adam Smith, the success of decentralized market economies is primarily due to

In an economy in which decisions are guided by prices and individual self-interest, there is

In a market economy,

Prices direct economic activity in a market economy by

If the government were to intervene and set the rent for apartments in New York City below the market rent, then we would expect, relative to the market outcome,

Which of the following statements about market economies is correct?

If the government were to intervene in a market economy and fix the price of visiting a health care provider below the market price, then we would expect, relative to the market outcome,

The self-interest of the participants in an economy is guided into promoting general economic self-interest by

The "invisible hand" works to promote general wellbeing in the economy primarily through

Which of the following statements does not apply to a market economy?

In a market economy, economic activity is guided by

Quiz 1: Ten Principles of Economics

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

In a market economy, who makes the decisions that guide most economic activity?

When the "invisible hand" guides economic activity, prices of products reflect

If the government were to intervene and set a wage for unskilled labor above the market wage, then we would expect, relative to the market outcome,

The decisions of firms and households are guided by prices and self-interest in a

In a market economy, economic activity is guided by

If the government were to intervene and set the price of a dozen eggs above the market price, then we would expect, relative to the market outcome,

For markets to work well, there must be

Prices usually reflect

According to Adam Smith, the success of decentralized market economies is primarily due to

In an economy in which decisions are guided by prices and individual self-interest, there is

In a market economy,

Prices direct economic activity in a market economy by

If the government were to intervene and set the rent for apartments in New York City below the market rent, then we would expect, relative to the market outcome,

Which of the following statements about market economies is correct?

If the government were to intervene in a market economy and fix the price of visiting a health care provider below the market price, then we would expect, relative to the market outcome,

The self-interest of the participants in an economy is guided into promoting general economic self-interest by

The "invisible hand" works to promote general well­being in the economy primarily through

Which of the following statements does not apply to a market economy?

In a market economy, economic activity is guided by

The "invisible hand" works to promote general wellbeing in the economy primarily through