Question 1

Which of the following is not one of the ﬁve fundamental questions?

Accepted Answer

The five fundamental questions are: 
1) What goods and services will be produced?
2) How will the goods and services be produced?
3) For whom will the goods and services be produced?
4) How will the economy accommodate change?
5) How will the system promote progress? 
The question of what prices will be charged for goods and services is not considered one of the fundamental questions.

Question 2

The economic function of proﬁts and losses is to

Accepted Answer

The economic function of profits and losses is to signal that resources should be reallocated. When a firm earns profits, it indicates that resources are being used efficiently and effectively, and this leads other firms to enter the market and compete. On the other hand, when a firm incurs losses, they signal that resources are being wasted and that the firm should re-allocate these resources to more profitable ventures. This dynamic process helps to allocate resources efficiently and improve overall economic welfare.

Question 3

The most eﬃcient combination of resources in producing a given output is the combination that

Accepted Answer

The most efficient combination of resources in producing a given output is the combination that minimizes the cost per unit of output. This means that resources are used in the most cost-effective manner, resulting in the least amount of waste or unnecessary expense.

Question 4

The market system's answer to the fundamental question "How will the goods and services be produced?" is essentially

Accepted Answer

The market system aims to produce goods and services in the most efficient way possible, which means producing them at the lowest cost per unit of output. This is achieved by minimizing costs through the use of various methods such as technology, labor, and machinery. Therefore, the correct answer is D, "In ways that minimize the cost per unit of output."

Question 5

The advent of Netﬂix movie streaming and Redbox kiosks renting DVD and Blu-ray movies have virtually demolished the market for video rentals from brick and mortar stores such as Blockbuster. This is an
Example of

Accepted Answer

This scenario describes the process of creative destruction, where new technologies or business models disrupt and replace older ones.

Question 6

The market system's answer to the fundamental question "What will be produced?" is essentially

Accepted Answer

The market system's main goal is to maximize proﬁt, so the goods and services produced will be those that are most likely to generate the greatest income and profits.

Question 7

The dollar votes of consumers ultimately determine the composition of output and the allocation of resources in a market economy. This statement best describes the concept of

Accepted Answer

Consumer sovereignty means that consumers have the power to determine what goods and services are produced and how resources are allocated based on their purchasing decisions. In a market economy, businesses will produce the goods and services that will sell the most, which is ultimately determined by consumers through their dollar votes.

Question 8

"Consumer sovereignty" means that

Accepted Answer

Consumer sovereignty means that buyers have the power to determine what will be produced based on their demand for certain goods and services. This is often referred to as "dollar votes" - consumers "vote" for the products they want to see more of by purchasing them, which signals to producers which products are in demand and should be produced more. This ultimately gives buyers control over the market through their purchasing decisions.

Question 9

The invisible hand concept suggests that

Accepted Answer

The invisible hand concept suggests that assuming there is competition, private interests and public interests will coincide, meaning that the pursuit of self-interest by individuals and firms in a market economy will lead to outcomes that benefit society as a whole. It does not imply the need for a national economic plan, that big businesses are inherently more efficient than small businesses, or that the competitiveness of a capitalistic market economy invariably diminishes over time.

Question 10

The market system's answer to the fundamental question "Who will get the goods and services?" is essentially

Accepted Answer

In a market system, the allocation of goods and services is determined by the forces of supply and demand. Buyers and sellers engage in voluntary transactions based on their own self-interest, and prices are determined by the equilibrium of supply and demand. Therefore, those who are most willing and able to pay for goods and services ultimately receive them in a market system.

Question 11

In a competitive market economy, ﬁrms select the least-cost production technique because

Accepted Answer

In a competitive market economy, firms aim to maximize their profits. By selecting the least-cost production technique, they can minimize their costs and increase their profits. This is the fundamental principle behind the profit motive in a market economy. Therefore, answer B is the best choice.

Question 12

Firms are motivated to minimize production costs because

Accepted Answer

Competitive pressures in the market will drive out higher-cost producers, making it necessary for firms to minimize production costs to stay competitive and profitable. Option A is not necessarily true, as minimizing production costs may not always be the most environmentally friendly way to produce goods. Option B is also not necessarily true, as minimizing production costs may involve using cheaper and more abundant resources, but not necessarily the smallest total quantity of resources. Option D is not true as well, as there is no guarantee that the government provides tax credits and subsidies to low-cost producers.

Question 13

If a competitive industry is neither expanding nor contracting, we would expect

Accepted Answer

In a competitive industry, economic profits should be zero in the long run due to the entry and exit of firms. However, total revenue and total opportunity cost may not necessarily be zero. As the industry is not expanding or contracting, there will be no change in the allocation of resources towards the industry. Therefore, option D is incorrect.

Question 14

"Consumer sovereignty" refers to the

Accepted Answer

Consumer sovereignty is the idea that consumers, through their purchasing decisions, determine what products and services will be produced and sold in the marketplace. Producers are therefore incentivized to produce goods that satisfy consumer demands, rather than producing goods that do not align with consumer preferences. This creates a market-driven economy where decisions of producers ultimately conform to consumer demands.

Question 15

The competitive market system

Accepted Answer

The competitive market system encourages innovation because successful innovators are rewarded with economic profits. In a competitive market, firms that develop new products or production techniques can gain a competitive advantage over their rivals and earn higher profits. This provides an incentive for entrepreneurs to innovate and invest in new ideas, technologies, and products. Only choice D correctly identifies this mechanism of innovation in the market system.

Question 16

The market system's answer to the fundamental question "How will the system accommodate change?" is essentially

Accepted Answer

The question about how the system will accommodate change is at the heart of a market system, and the guiding function of prices and the incentive function of profits are the primary ways in which the system adapts to changes in supply and demand. Government leadership and direction may play a role in some cases, but it is not the fundamental answer to this question. Training and retraining programs and trial and error may be important in certain contexts, but they are not the core mechanisms through which a market system accommodates change.

Question 17

In a market economy, the distribution of output will be determined primarily by

Accepted Answer

In a market economy, the quantity and price of resources that households supply will determine the distribution of output. As resources are allocated to those who are willing and able to pay for them, the resulting output will reflect the preferences and needs of consumers. The government may regulate some aspects of the economy, but it does not determine the distribution of output. Equitable distribution is often debated, but it is ultimately influenced by market forces.

Question 18

The invisible hand refers to the

Accepted Answer

The invisible hand is a concept in economics that suggests that, in a competitive market, self-interested behavior can lead to the most efficient use of resources and promote the well-being of society as a whole. This is because producers will seek to maximize profits, and consumers will seek to maximize their own utility, resulting in prices and quantities that reflect the true value of goods and services. This concept was popularized by economist Adam Smith in his book The Wealth of Nations.

Question 19

The market system's answer to the fundamental question "How will the system promote progress?" is essentially

Accepted Answer

The market system's answer to promoting progress is through the profit potential that encourages the development of new technology. This means that individuals and firms are incentivized to innovate and improve technology in order to make a profit, which in turn promotes progress in the economy. The other choices (government-funded research programs, redistribution of income, training and retraining programs) may have some impact on progress, but are not the market system's primary approach.

Question 20

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

Accepted Answer

The invisible-hand concept is based on the idea that individuals acting in their own self-interest will unintentionally promote the greater good of society. The market mechanism directs resources toward the most valued uses, allowing the economy to operate efficiently without the need for central planning or government intervention. Choice A best describes this concept.

Quiz 2: The Market System and the Circular Flow