Deck 2: The Market System and the Circular Flow

Question 1

The government may not implement policies intended to redistribute income in which of the following economic systems?

A) Laissez-faire capitalism
B) Command system
C) Mixed economy
D) Market system

Answer 1

Laissez-faire capitalism

Question 2

Which of the following statements about the right to private ownership is false?

A) It enables individuals to obtain, use, and dispose of land and capital resources as they see fit
B) It encourages investment and innovation, and thus fosters economic growth
C) It extends to intangibles such as pieces of music and computer programs
D) It weakens the incentive to maintain the property that one already owns

Answer 2

It weakens the incentive to maintain the property that one already owns

Question 3

Which of the following statements about self-interest in a market system is false?

A) Self-interest usually motivates an individual to deliver something of value to others
B) Self-interest of entrepreneurs implies seeking maximum profits or minimum losses
C) Self-interest applies only to capitalists and entrepreneurs, not to workers employed by others
D) In a market system, consumers are just like firms: self-interest is what motivates them

Answer 3

Self-interest applies only to capitalists and entrepreneurs, not to workers employed by others

Question 4

The economies of North Korea and Cuba are:

A) Similar in that they are both basically command systems
B) Similar in that they are both basically market systems
C) Different in that North Korea has a command system while Cuba has a market system
D) Different in that Cuba has a command system while North Korea has a market system

Question 5

The market system is an economic system that:

A) Produces more consumer goods than capital goods
B) Produces more capital goods than consumer goods
C) Gives private individuals the right to own resources used in production
D) Emphasizes the government's power to control markets and direct economic activity

Question 6

Economic systems differ from one another based on who own the factors of production and:

A) How much resources are available in the economy and where they are located
B) Who make decisions regarding what to produce and how it is produced
C) What kinds of products are produced in the economy and how plentiful they are
D) How big the population is, and the makeup of the population

Question 7

In a command system:

A) Self-interest motivates and commands each business firm's decisions and actions
B) The head of each family decides what to do with the family's resources
C) The government makes production and allocation decisions
D) Market traders command what outputs are produced and how they are allocated

Question 8

Which of the following would not be emphasized in a capitalist economy?

A) Private ownership of capital and other resources
B) Competition and decentralized decisions
C) Reliance on market forces to coordinate economic activity
D) Prevention of owners of capital from exposing this resource to risk

Question 9

Competition is more likely to exist when:

A) There is easy entry into and exit out of industries
B) A government-issued license is required to set up a firm in an industry
C) The government purchases most goods and services
D) Economic power is concentrated among a few large firms

Question 10

By freedom of enterprise, we mean that individual:

A) Workers are free to look for jobs and work in whichever firm will hire them
B) Firms are free to employ resources, to produce their output, and to sell their products
C) Producers are free to produce whatever the government decides are needed by the society
D) Consumers are free to buy whatever products will satisfy their needs the most

Question 11

Consumers express self-interest when they:

A) Seek the lowest price for a product
B) Reduce business losses
C) Collect economic profits
D) Exclude others in their thinking

Question 12

The government may impose industrial safety regulations and occupational licensing requirements in which of the following economic systems?

A) Laissez-faire economy
B) Pure capitalism
C) Mixed market economy
D) Macroeconomic system

Question 13

Which of the following statements is correct?

A) The operation of a market system eventually results in an equal distribution of income
B) Producers are "sovereign" in a market economy because they determine what is produced
C) The market system is efficient at allocating resources, but not at allocating products
D) Freedom of choice and enterprise are essential elements of the market system

Question 14

Private ownership and property rights in a market system have the following implications, except:

A) Individuals are free to take on the financial risks involved in a business
B) Trades that take place in the economy are mutually-agreeable transactions among individuals
C) Economic agents are allowed to act in their own self-interest
D) Large firms are allowed to coerce other firms and individuals

Question 15

Capitalism gets its name from the fact that capital resources are mostly:

A) Owned by the state or government
B) Given the highest priority in the economy's income distribution
C) Treated as private property
D) In the form of money and financial resources

Question 16

One major element of the command system is:

A) An emphasis on private ownership of resources
B) Individual decentralized decision-making
C) Reliance on supply-and-demand forces to guide economic activity
D) Central planning conducted by the government

Question 17

Laissez-faire capitalism limits the government's economic functions to the following, except:

A) Protecting private property rights
B) Establishing a legal environment to enforce contracts among individuals
C) Preventing individuals and firms from coercing others
D) Setting prices of individual goods and services

Question 18

In a market system, self-interest is the motivating force that:

A) Makes individuals unwilling to deliver anything of value to others
B) Makes owners of resources always want to use their resources themselves
C) Leads the economy to chaos and confusion, especially the larger economies
D) Coordinates and creates consistency in the operations of various parts of the economy

Question 19

Laissez-faire capitalism is characterized by:

A) Very limited government role in the economy
B) Active government intervention in the economy
C) Individuals and firms abiding by a government economic plan
D) A very fair distribution of income and wealth

Question 20

The market system is also known as:

A) Capitalism
B) Socialism
C) Central planning
D) Production system

Question 21

International specialization and trade:

A) Has to be done on a barter system
B) Often requires the exchange of currencies
C) Does not illustrate the division of labor
D) Requires active government regulation

Question 22

All of the following statements describe a market economy except:

A) Government prescribes the market prices for goods and services
B) Prices provide important signals to buyers and sellers
C) The allocation of resources is determined by their prices
D) The actions of buyers and sellers establish a product's price

Question 23

Which of the following does not foster innovation and technological advance?

A) Competition in markets
B) Freedom of choice and enterprise
C) Self-interest and personal rewards
D) Fear and avoidance of risk

Question 24

The Heritage Foundation in 2012 ranked which of the following economies to have among the highest economic freedom?

A) The United States
B) Germany
C) Argentina
D) Hong Kong

Question 25

Competition in a market system denotes a condition where:

A) The diffusion of economic power limits its potential abuse
B) Any given product can be purchased at a wide range of prices
C) Contractual agreements among individual firms are restricted and avoided
D) A few large sellers are constantly jostling for market share

Question 26

Anything that is generally acceptable in trading for goods and services is a:

A) Medium of exchange
B) Capital good
C) Store of value
D) Token money

Question 27

A production system where various workers concentrate on different specialized tasks to contribute towards a whole product is referred to as:

A) A coincidence of wants
B) Roundabout production
C) Freedom of enterprise
D) Division of labor

Question 28

In a capitalist system, the decisions and actions of millions of consumers and firms are highly coordinated by:

A) The state and government
B) Markets and prices
C) A central planning agency
D) An international organization

Question 29

Which of the following statements about markets and prices is correct?

A) In a market system, buyers and sellers must be in face-to-face contact with each other
B) Prices affect the distribution of goods in a market system but not the allocation of resources
C) In a market system, prices serve to ration goods and services to consumers
D) The operation of a market system has little, if any, effect on the distribution of income in the economy

Question 30

Specialization is beneficial:

A) At the individual firm level, but not at the national and international levels
B) At the individual, regional, and even international levels
C) Only if there are differences in the abilities of resources
D) Only as long as money and capital goods are employed

Question 31

Which of the following is necessary to make a trade in a barter economy?

A) Money
B) Unlimited wants
C) A medium of exchange
D) A coincidence of wants

Question 32

Which of the following is not a reason why specialization and trade are beneficial to society?

A) The total output of economic goods may be increased even without any increase in resources
B) Scarce resources are utilized more efficiently by exploiting differences among them
C) Specialization fosters learning by doing, thus lowering the unit-costs of products
D) Firms and workers become less dependent on others for producing goods and services

Question 33

A required element for specialization to lead to an increase in the satisfaction of society's wants is:

A) A capitalist economy
B) Exchange and trade
C) The use of money
D) A central plan

Question 34

An economic system in which money is not used is a:

A) Planned economy
B) Market economy
C) Mixed economy
D) Barter economy

Question 35

Which is an example of barter?

A) A person trades a desk for a box of tools
B) A person buys clothes at a used clothing store
C) A gift of tuition money from parents to their children
D) The purchase of stock on the New York Stock Exchange

Question 36

Which of the following is the main problem with the barter system of exchange?

A) It encourages self-interest
B) It fosters the division of labor
C) It requires a coincidence of wants
D) It undermines the right to bequeath

Question 37

A characteristic of the market system is:

A) Extensive use of direct methods of production
B) A focus on labor, as opposed to capital resources
C) Reliance on the use of capital goods to expand total output
D) Avoidance of producing goods that do not satisfy consumer wants directly

Question 38

The use of money for exchange and trade:

A) Increases the importance of barter
B) Fosters more specialization in production
C) Reduces consumer sovereignty
D) Raises the need for a coincidence of wants

Question 39

With specialization in a market economy, individual:

A) Firms produce a wide range of products
B) Producers consume little or none of the products they produce
C) Producers consume most of the output that they produce
D) Consumers have to produce most of what they consume

Question 40

How does human specialization contribute towards increasing an economy's output?

A) It exploits the differences in abilities
B) It is a process of creative destruction
C) It pushes each worker to master the whole product
D) It encourages people to be "jacks-of-all-trades"

Question 41

Which of the following is assumed to be most limited in scope under a market system?

A) Entrepreneurship
B) Self-interest
C) Competition
D) Government

Question 42

Consumer sovereignty and "dollar votes" guide the market system in dealing with which fundamental economic question?

A) Which output will be produced?
B) How is the output to be produced?
C) How can the system accommodate change?
D) Who is to receive the output?

Question 43

Suppose a firm can produce 70 units of a product, Zenia, by combining labor, land, capital, and entrepreneurial ability, as in the four alternative techniques shown in the table below. Assume further that the firm can hire labor at $3 per unit, land at $3 per unit, capital at $6 per unit, and entrepreneurship at $9 per unit. Refer to the above table. If the price of labor declines from $3 to $2 per unit, then what is the least costly way of producing Zenias?

A) A
B) B
C) C
D) D

Question 44

The following table illustrates alternative production techniques for producing 18 widgets that can be sold for $1 each for a total revenue of $18. Based on the data given in the table above, the most economically efficient production technique is:

A) A
B) B
C) C
D) D

Question 45

Suppose a firm can produce 70 units of a product, Zenia, by combining labor, land, capital, and entrepreneurial ability, as in the four alternative techniques shown in the table below. Assume further that the firm can hire labor at $3 per unit, land at $3 per unit, capital at $6 per unit, and entrepreneurship at $9 per unit. Refer to the above table. Which technique is the most economically efficient way of producing Zenia?

A) A
B) B
C) C
D) D

Question 46

Which is one of the five fundamental questions that need to be dealt with in any economic system?

A) What makes the rate of unemployment low?
B) Who will be the richest group in the economy?
C) How will goods and services be produced?
D) How high should the prices of goods and services be?

Question 47

The market system is said to be characterized by "consumer sovereignty." This is because:

A) A sovereign government determines which consumer goods will be produced
B) The prices of consumer goods are regulated by a sovereign government
C) Firms must match their production decisions to the consumers' choices
D) Consumer goods are considered to be more important than capital goods

Question 48

Why might a company use barter rather than money to make a trade?

A) Barter trade is generally more efficient than money-based trade
B) Barter can enable two firms to trade when their cash flows are limited
C) Money requires a coincidence of wants, barter is more direct
D) Money is efficient only for large transactions, so barter is preferred for smaller transactions

Question 49

McDonald's introduced the "Big Mac" in 1968 and it turned out to be a hit, but the "Arch Deluxe" introduced in 1996 was not. The success or failure of a product in the market system is determined by:

A) Capitalism and entrepreneurship
B) Specialization and exchange
C) Consumer sovereignty and dollar votes
D) Capital goods and roundabout production

Question 50

Suppose a firm can produce 70 units of a product, Zenia, by combining labor, land, capital, and entrepreneurial ability, as in the four alternative techniques shown in the table below. Assume further that the firm can hire labor at $3 per unit, land at $3 per unit, capital at $6 per unit, and entrepreneurship at $9 per unit. Refer to the above table, and suppose that the firm uses production technique D If each of the 70 units of Zenia that are produced sells for $1 apiece, then how much will be the profits of the firm from 70 units?

A) $70
B) $57
C) $13
D) $83

Question 51

The term consumer sovereignty means that:

A) Government is responsible for protecting consumers' interests
B) What is produced is ultimately determined by what consumers buy
C) There are no limits on what consumers may buy in a market system
D) Producers have strong control over what consumers buy

Question 52

Economic efficiency is the primary guide in answering which of the fundamental questions in a market economy?

A) What will be produced?
B) How is the output to be produced?
C) How can the system accommodate change?
D) Who is to receive the output?

Question 53

If a nation restricts trade with other nations, then the most likely effect is:

A) Lower prices of goods and services in the nation
B) Increased specialization of production
C) Expanded economic wealth of the nation
D) Make consumers in the nation worse off

Question 54

Which of the following is not one of the five fundamental questions that an economy must deal with?

A) How will the goods and services be produced?
B) Why should the goods and services be produced?
C) Who is to receive the goods and services produced in the economy?
D) In what ways will progress be promoted?

Question 55

In a market system, which of the following will eliminate high-cost producers, and allow only the low-cost producers to survive?

A) Competition
B) Money
C) A sovereign government
D) Specialization

Question 56

Payments that a firm makes to obtain needed resources comprise its:

A) Costs
B) Profits
C) Capital
D) Revenues

Question 57

The following table illustrates alternative production techniques for producing 18 widgets that can be sold for $1 each for a total revenue of $18. Refer to the above table. Using the technique cited in the previous question will result in an:

A) Economic loss of $2
B) Economic profit of $1
C) Economic profit of $2
D) Economic profit of $3

Question 58

If the total costs of producing 1,500 units of output is $15,000 and this output sold to consumers for a total of $16,500, then the firm would earn profits of:

A) $1,000
B) $16,500
C) $1,500
D) $15,000

Question 59

The term dollar votes in a market system means:

A) Inflation will occur if consumers don't spend wisely
B) Voters may be offered dollars to help elect certain political candidates
C) Government is responsible for determining what will be considered legal tender
D) Consumers "vote" for certain products to be produced by how they spend their incomes

Question 60

The production technique that is most efficient is the one that produces a given amount of output:

A) using the least amount of labor resources
B) at the highest price per unit
C) at the lowest cost per unit
D) that yields the highest revenues

Question 61

The idea that the desires of resource suppliers and firms to further their own self-interest will automatically further the public interest is known as:

A) Consumer sovereignty
B) The invisible hand
C) Derived demand
D) Creative destruction

Question 62

"For whom is a given mix of goods and services to be produced? How, in other words, are the society's outputs to be distributed among its members?" In a market economy, this question is resolved primarily in the:

A) Public sector through the mechanism of central planning
B) Business sector through the mechanism of advertising
C) Private sector through the earning and spending of income
D) Money market through borrowing and saving by households and businesses

Question 63

In a market economy, the incomes of consumers depend primarily upon:

A) Government policies in setting wages and interest rates
B) The quantity and prices of resources that they possess
C) The amount of savings that they have accumulated
D) How closely connected they are to government and business leaders

Question 64

The "invisible hand" concept refers to the:

A) Guiding function of prices in a market system
B) Implicit influence that the government has on the actions of firms
C) Regulatory structure that markets must operate in
D) Underlying money flows that promote the trading of goods and services

Question 65

The following table illustrates alternative production techniques for producing 18 widgets that can be sold for $1 each for a total revenue of $18. Refer to the above table. At the $3 price for labor the most efficient technique will result in an:

A) Economic loss of $2
B) Economic profit of $l
C) Economic profit of $2
D) Economic profit of $3

Question 66

Capital accumulation in a market system results from:

A) Increased purchases of consumers or households
B) The "invisible hand" that guides the market
C) Dollar votes by entrepreneurs and business owners
D) Consumer sovereignty that prevails in the market

Question 67

Which of the following best describes the "invisible hand" concept?

A) Ample regulation of business by the government will maximize the public's best interests
B) The market system works best when resources are free to move from one use to another
C) The problem of scarcity can best be overcome in a system of mixed capitalism
D) Self-interest in a market system will automatically promote the public interest as well

Question 68

The highly influential book by Adam Smith, who brought up the "invisible hand" notion, is titled:

A) The Worldly Philosophers
B) The Affluent Society
C) The Age of the Economist
D) The Wealth of Nations

Question 69

Which of the following does not illustrate the idea of creative destruction?

A) Digital downloads have shrunk the market for CDs and DVDs
B) Online retail sales have increased, while brick-&-mortar sales have slowed down
C) The opening of a new mall reduces the traffic in another mall
D) A firm has to destroy some of the expired products in its inventory

Question 70

The distribution of income in a market system is a primary factor that resolves which of the following fundamental economic questions?

A) What will be produced?
B) How will the output to be produced?
C) How will the system accommodate change?
D) Who will get the output?

Question 71

An increase in the demand for a product and a reduction in its costs of production would:

A) Decrease the profits of producers
B) Encourage firms to leave an industry
C) Encourage firms to enter an industry
D) Cause a shortage of the product

Question 72

In a market system, resources will move away from an industry when:

A) Profits of firms in the industry are rising
B) Demand for the industry's product is decreasing
C) The production of output in the industry is rising
D) Profits of firms in other industries are falling

Question 73

The development of the digital video and camera which replaced film cameras is an example of:

A) Roundabout production
B) Derived demand
C) Creative destruction
D) Specialization

Question 74

"Creative destruction" in a market system is brought about by:

A) Entrepreneurship
B) Striking workers
C) Regulation by the government
D) Money-based trade

Question 75

The market system communicates changes in market conditions and elicits appropriate responses from businesses and resource suppliers through changes in prices. This is known as the:

A) Guiding function of prices
B) Monetary function of prices
C) Circular flow of income
D) Market determination of prices

Question 76

The following table illustrates alternative production techniques for producing 18 widgets that can be sold for $1 each for a total revenue of $18. Refer to the above table. If the price per unit of labor were to increase from $2 to $3, the most efficient production technique would then be:

A) A
B) B
C) C
D) D

Question 77

In a market system, the distribution of goods and services among consumers is largely determined by:

A) The willingness and ability of consumers to pay the prices
B) Whoever needs the goods and services the most
C) Whoever has the closest connection to firms and the government
D) A random factor that is almost impossible to predict

Question 78

If economic profits in a particular industry increase, then we would expect:

A) Resources to be diverted away from that industry
B) Firms in that industry to produce less output
C) Firms to enter that industry thus expanding it
D) Consumers to buy less from that industry

Question 79

The major virtues of the market system include all of the following, except:

A) It promotes an efficient allocation of resources
B) It leads to equality in the distribution of income
C) It provides incentives for greater production and higher incomes
D) It emphasizes the freedom to pursue self-interest

Question 80

In a market system, as one industry expands while another contracts, resources will flow:

A) Away from the expanding industry towards the contracting one
B) From one industry due to the changes in resource prices paid by firms
C) Towards the industry where the product demand is declining
D) Because resource allocation will have to equalize between the two industries