Question 1

The most efficient combination of resources in producing any output is that combination which:
A)comes closest to using the same quantities of land, labour, capital, and entrepreneurial ability.
B)can be obtained for the smallest money outlay.
C)uses the smallest total quantity of all resources.
D)conserves most on the use of labour.

Accepted Answer

The most efficient combination of resources in producing any output is the one that can be obtained for the smallest money outlay. This is because efficiency in production involves minimizing costs while achieving a desired level of output. Choices A, C, and D do not necessarily reflect the most cost-effective or efficient use of resources.

Question 2

In market economies, profit primarily depends on consumer demand, production efficiency, and product quality.In contrast, in command economies, profit depends on:
A)production cost.
B)product quality.
C)product mix.
D)quantitative production targets.

Accepted Answer

In command economies, profit primarily depends on meeting quantitative production targets set by the government, rather than responding to consumer demand or optimizing production efficiency and product quality.

Question 3

The coordination problem in command economies became more difficult as:
A)the number of industries expanded.
B)less quantitative targets were assigned to each industry.
C)planning techniques improved.
D)production cost decreased.

Accepted Answer

As the number of industries expanded in command economies, it became more difficult to coordinate and control the production and distribution of goods and services. This led to inefficiencies and delays in meeting targets and fulfilling consumer demand.

Question 4

As opposed to the market system, in command economies:
A)the reward for innovation is extensive.
B)the reward for innovation does not exist.
C)meeting the production targets are extremely important.
D)the profit motives are extremely high.

Accepted Answer

In a command economy, the government controls the allocation of resources and distribution of goods and services, thus innovation is not typically incentivized or rewarded. Production targets are important in order to meet the needs of the population, not for profit motives.

Question 5

The development of the Internet and e-mail to replace regular mail services in many cases would be an example of:
A)roundabout production.
B)derived demand.
C)creative destruction.
D)specialization.

Accepted Answer

Creative destruction refers to the process where new innovations or technologies replace older ones, leading to the destruction of the old system. The development of the Internet and e-mail has replaced regular mail services in many cases, which is an example of creative destruction.

Question 6

The two basic markets shown by the simple circular flow model are:
A)capital goods and consumer goods.
B)free and controlled.
C)product and factor.
D)household and business.

Accepted Answer

The simple circular flow model shows two basic markets: the product market, where goods and services are sold, and the factor market, where factors of production (like labor, capital, and land) are bought and sold.

Question 7

Assume the demand for product Y increases and the subsequent market system responses result in the production of more Y.This illustrates:
A)that the concept of derived demand is inapplicable.
B)that consumer sovereignty is inoperative in this economy.
C)the scarcity function of prices.
D)the directing or guiding function of prices.

Accepted Answer

The increase in demand for product Y causes the market system to respond by increasing the production of Y, which is an example of the directing or guiding function of prices. The price acts as a signal to producers to increase production to meet the higher demand. This function helps to allocate resources efficiently in a market economy. The other options are incorrect as derived demand remains applicable, consumer sovereignty is still in operation and the scarcity function of prices is not illustrated by this scenario.

Question 8

The "invisible hand" concept suggests that:
A)changes in product demands are only randomly reflected in changes in the demands for resources.
B)profit maximization is inconsistent with an efficient allocation of resources.
C)government action is necessary to correct for market failures.
D)when firms maximize their profits, society's domestic output will also be maximized.

Accepted Answer

The "invisible hand" concept, first introduced by economist Adam Smith, suggests that when businesses and individuals pursue their own self-interest and maximize their profits, the market mechanisms of supply and demand will work together to allocate resources efficiently and maximize society's output. This means that when firms maximize their profits, society's domestic output will also be maximized. Therefore, option D is the correct choice. Options A, B, and C are incorrect as they contradict the concept of the "invisible hand".

Question 9

Which statement accurately summarizes the relationship between the prices of goods and their relative scarcity?
A)The price of a good is a direct function of the relative scarcity of the good.
B)The price of a good is an inverse function of the relative scarcity of the good.
C)The price of a good is independent of the relative scarcity of the good.
D)High prices lead to greater relative scarcity.

Accepted Answer

The relationship between the prices of goods and their relative scarcity can be summarized by saying that the price of a good is a direct function of the relative scarcity of the good. This means that as the relative scarcity of a good increases, its price also increases. Conversely, as the relative scarcity of a good decreases, its price decreases as well. This relationship is explained by the basic laws of supply and demand. When the supply of a good is limited and demand for it is high, the price of the good will be driven up as buyers compete for access to the scarce resource. Similarly, when the supply of a good is abundant and demand is low, the price of the good will fall due to a lack of competition among buyers.

Question 10

In the factor market:
A)businesses borrow money capital from households.
B)businesses sell services to households.
C)households sell resources to businesses.
D)firms sell raw materials to households.

Accepted Answer

In the factor market, businesses purchase resources such as land, labor, and capital from households. Therefore, choice C, households sell resources to businesses, is the correct answer. Choices A, B, and D are incorrect because they describe activities that occur in other markets (such as the credit market or the product market) rather than the factor market.

Question 11

The "invisible hand" concept suggests that:
A)market failures imply the need for a national economic plan.
B)big businesses are inherently more efficient than small businesses.
C)the competitiveness of a capitalistic market economy invariably diminishes over time.
D)given competition, private and public interests will tend to coincide.

Accepted Answer

The "invisible hand" concept suggests that in a free market economy, the pursuit of self-interest by individuals and businesses will ultimately lead to the promotion of the general welfare of society as a whole. This is because, given competition, private and public interests will tend to coincide. Therefore, option D is the best choice.

Question 12

The "invisible hand" refers to the:
A)fact that our tax system redistributes income from rich to poor.
B)notion that, under competition, decisions motivated by self-interest promote the social interest.
C)tendency of monopolistic sellers to raise prices above competitive levels.
D)fact that government controls the functioning of the market system.

Accepted Answer

The "invisible hand" refers to Adam Smith's idea that in a competitive market, individual self-interest will lead to economic prosperity and the promotion of the social interest. This means that as individuals make choices to maximize their own profits, they inadvertently work to benefit society as a whole by producing goods and services that are in high demand and keeping prices competitive. It does not refer to government control or monopolistic behavior.

Question 13

The idea that the desires of resource suppliers and producers 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)profit maximization.

Accepted Answer

The idea that the desires of resource suppliers and producers to further their own self-interest will automatically further the public interest is known as the concept of the "invisible hand," as originally postulated by Adam Smith in his book "The Wealth of Nations." According to Smith, individual self-interest within a competitive market economy can lead to efficient production, low prices, and widespread prosperity, without the need for government intervention or regulation.

Question 14

In the simple circular flow model:
A)households are demanders of factors of production.
B)businesses are suppliers of final products.
C)households are suppliers of final products.
D)there are real flows of goods, services, and factors, but not money flows.

Accepted Answer

The answer of In the simple circular flow model:
A)households are...

Question 15

The idea that firms and resource suppliers in seeking to further their own self-interests in a competitive market economy also simultaneously promotes the public or social interest is a description of:
A)the guiding function of prices.
B)capital accumulation.
C)the "invisible hand."
D)dollar votes.

Accepted Answer

This is a description of the concept of the "invisible hand," which was first introduced by economist Adam Smith. It suggests that individuals pursuing their own self-interest in a free market will ultimately benefit society as a whole by stimulating economic growth and efficiency.

Question 16

The simple circular flow model shows that:
A)households are on the demand side of both product and factor markets.
B)businesses are on the supply side of both product and factor markets.
C)households are on the supply side of the factor market and on the demand side of the product market.
D)businesses are on the demand side of the product market and on the supply side of the factor market.

Accepted Answer

The simple circular flow model shows that households are on the supply side of the factor market (where they provide labor and other factors of production) and on the demand side of the product market (where they buy goods and services). Businesses, on the other hand, are on the demand side of the factor market (where they buy factors of production) and on the supply side of the product market (where they sell goods and services). Therefore, choice C is the correct answer.

Question 17

Which of the following best describes the "invisible hand" concept?
A)The desires of resource suppliers and producers to further their own self-interest will automatically further the public interest.
B)The non substitutability of resources gives rise to a conflict between private and public interests and the need for government intervention.
C)Mixed capitalism is the best system for overcoming the scarce resources-unlimited wants problem.
D)Central direction by the government will improve resource allocation in a capitalistic economy.

Accepted Answer

The "invisible hand" concept, introduced by Adam Smith in his book "The Wealth of Nations," refers to the idea that the free market operates under an "invisible hand" that guides individuals' self-interested actions towards promoting the overall good of the economy. Essentially, when individuals pursue their own self-interest in the marketplace (such as by seeking profits or striving to improve their standard of living), their actions will benefit others by creating jobs, lowering prices, and encouraging innovation. The invisible hand concept suggests that the public interest can be served without the need for government intervention, as long as individuals are free to make their own economic decisions.

Question 18

Households and businesses are:
A)both buyers in the factor market.
B)both suppliers in the product market.
C)suppliers in the factor and product markets respectively.
D)suppliers in the product and factor markets respectively.

Accepted Answer

Households supply factors of production (i.e. labor, capital, land, and entrepreneurship) in the factor market, while businesses supply goods and services in the product market. Therefore, households are suppliers in the factor market and businesses are suppliers in the product market.

Question 19

The development of MP3 players that significantly reduce the market for CDs and DVDs would be an example of:
A)specialization.
B)derived demand.
C)roundabout production.
D)creative destruction.

Accepted Answer

Creative destruction refers to the process by which new innovations or technologies render previous innovations or technologies obsolete. In this case, the development of MP3 players led to a significant reduction in the market for CDs and DVDs, leading to the decline of these technologies.

Question 20

In the circular flow model:
A)households supply factors of production to firms.
B)households receive income through the factor market.
C)households spend income in the product market.
D)all of the above hold true.

Accepted Answer

All of the above choices hold true in the circular flow model. Households supply the factors of production to firms such as land, labor, capital, and entrepreneurship. In return, households receive income through the factor market. Households then spend this income in the product market for goods and services produced by firms. This circular flow of income and resources between households and firms drives the economy.

Quiz 2: Part B: The Market System and the Circular Flow

The most efficient combination of resources in producing any output is that combination which:

In market economies, profit primarily depends on consumer demand, production efficiency, and product quality.In contrast, in command economies, profit depends on:

The coordination problem in command economies became more difficult as:

As opposed to the market system, in command economies:

The development of the Internet and e-mail to replace regular mail services in many cases would be an example of:

The two basic markets shown by the simple circular flow model are:

Assume the demand for product Y increases and the subsequent market system responses result in the production of more Y.This illustrates:

The "invisible hand" concept suggests that:

Which statement accurately summarizes the relationship between the prices of goods and their relative scarcity?

In the factor market:

The "invisible hand" concept suggests that:

The "invisible hand" refers to the:

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

In the simple circular flow model:

The idea that firms and resource suppliers in seeking to further their own self-interests in a competitive market economy also simultaneously promotes the public or social interest is a description of:

The simple circular flow model shows that:

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

Households and businesses are:

The development of MP3 players that significantly reduce the market for CDs and DVDs would be an example of:

In the circular flow model: