The bankruptcy of firms:
A) should not occur in a well-functioning economy.
B) frees up resources to higher-valued uses, a vital role in capitalism.
C) is not possible in monopoly markets.
D) is pro-cyclical with economic activity, as measured by gross domestic product.

Question

Quizplus · Accepted Answer

Bankruptcy plays a vital role in capitalism by freeing up resources from less efficient and less profitable firms that can then be used for higher-valued purposes. This improves overall economic efficiency and productivity. Therefore, the occurrence of bankruptcy is not necessarily an indication of a malfunctioning economy, but rather a necessary aspect of the market system.

Note: A is incorrect because bankruptcies can occur even in a well-functioning economy. C is incorrect because monopolies have significant market power and are less likely to face bankruptcy. D is incorrect because bankruptcy can occur at any point in the economic cycle, although it may be more common during recessions or downturns.

The Bankruptcy of Firms