Question 1

Which of the following is NOT a device to reduce transaction costs?
A) Shopping centers
B) Auto dealers located close together
C) Government prohibitions on advertising
D) Banks that direct funds from savers to borrowers

Accepted Answer

Government prohibitions on advertising would actually increase transaction costs by limiting the flow of information and options available to buyers and sellers. The other options, such as shopping centers, auto dealers located close together, and banks that direct funds from savers to borrowers, are all devices that help to reduce transaction costs.

Question 2

Specialists who try to lower transaction costs are
A) consumers.
B) producers.
C) bureaucrats.
D) middlemen.

Accepted Answer

Middlemen specialize in reducing transaction costs by creating market efficiencies, such as aggregating small transactions, providing information, and facilitating exchanges. Consumers benefit indirectly from lower transaction costs, but they are not typically involved in the process of reducing them. Producers may try to minimize their own transaction costs, but this is not a specialized role. Bureaucrats are not typically involved in market transactions and may actually increase transaction costs through regulation and bureaucracy.

Question 3

The signaling aspect of the market system refer to
A) legal requirements for contracts and exchanges.
B) the price of the good to the consumer and producer.
C) the voluntary character of the exchange.
D) transaction costs of carrying out exchanges.

Accepted Answer

The signaling aspect of the market system refers to the price of the good to the consumer and producer. The price provides signals and incentives for producers to increase or decrease production or for consumers to increase or decrease consumption.

Question 4

The signals in markets are determined
A) by supply and demand.
B) for all goods by the government through the use of price controls.
C) in an unfair manner that ends up hurting the poor.
D) by nonprice rationing devices.

Accepted Answer

The signals in markets are determined by supply and demand. Prices adjust to reflect the available supply of a good or service and the level of demand for that good or service. When demand exceeds supply, prices tend to rise, signaling producers to increase production. Conversely, when supply exceeds demand, prices tend to fall, signaling producers to decrease production. This is the fundamental mechanism of how markets allocate resources efficiently.

Question 5

An economic system in which relative prices change to reflect changes in supply and demand for different commodities is known as a
A) socialist system.
B) communist system.
C) queuing system.
D) market system.

Accepted Answer

A market system is characterized by the interaction of buyers and sellers who exchange goods and services. In a market system, prices are determined by the forces of supply and demand, which reflect the scarcity and value of resources used to produce goods and services. This system allows for relative price changes to occur, reflecting changes in supply and demand for different commodities. Socialism and communism refer to alternative economic systems based on central planning, while queuing systems refer to methods of allocating goods and services based on waiting in line.

Question 6

In a market system, the costs associated with exchanging goods are known as
A) voluntary costs.
B) signaling costs.
C) wholesale costs.
D) transaction costs.

Accepted Answer

The costs associated with exchanging goods in a market system are known as transaction costs. This includes costs such as search costs (the time and effort it takes to find a seller or buyer), bargaining costs (the time and effort it takes to negotiate a fair price), and enforcement costs (the cost of ensuring that the terms of the exchange are fulfilled). These costs can all affect the efficiency and effectiveness of the market system.

Question 7

In a market system, intermediaries in the exchange process are known as
A) producers.
B) consumers.
C) middlemen.
D) free agents.

Accepted Answer

Intermediaries in the exchange process are commonly referred to as middlemen. These individuals or organizations help facilitate transactions between producers and consumers by connecting them through various channels, such as wholesalers, retailers, brokers, or distributors. Middlemen add value to the transaction by providing services such as information, storage, transportation, financing, risk-taking, or marketing. Their role is essential in a market system to reduce transaction costs, improve market efficiency, and enhance customer satisfaction.

Question 8

The price system features
A) exchanges made in currency only.
B) voluntary exchange that makes both the consumer and producer better off.
C) exchanges made only on a barter basis.
D) an exchange in which consumer is made better off and the producer is made worse off.

Accepted Answer

The price system is based on voluntary exchange, where both the consumer and producer choose to engage in a transaction because they believe it will make them better off. This is achieved through the use of prices, which are signals that communicate information about the relative scarcity of goods and services, and which guide the allocation of resources in the economy. The price system does not require exchanges to be made in currency or on a barter basis, nor does it result in one party being made worse off.

Question 9

Which of the following is NOT an example of a transaction cost?
A) The enjoyment of owning the good.
B) The opportunity cost of time spent looking for stores that sold the good desired.
C) The cost of returning a defective product.
D) Time spent bargaining over the price of a good.

Accepted Answer

Transaction costs are costs incurred in making an exchange or transaction, such as the cost of searching for goods, negotiating prices, and completing transactions. The enjoyment of owning a good is not a transaction cost.

Question 10

In a market system, what must take place for quantity demanded to continually be equated with quantity supplied?
A) Price controls must be applied by governments.
B) Relative prices must be able to adjust to market clearing levels.
C) Tastes and preferences of consumers must adjust to eliminate surpluses or shortages.
D) Businesses must engage in involuntary, unprofitable exchanges to eliminate surpluses or shortages.

Accepted Answer

In a market system, relative prices must be able to adjust to market clearing levels for quantity demanded to continually be equated with quantity supplied. This means that when there is excess supply, prices will fall, which will increase demand and decrease supply until the two are equal. Similarly, when there is excess demand, prices will rise, which will decrease demand and increase supply until the two are equal. Price controls by governments (A) and adjustments in tastes and preferences (C) may temporarily affect demand and supply, but they do not provide a sustainable equilibrium. Involuntary and unprofitable exchanges (D) do not serve the interests of businesses and are not a necessary condition for equilibrium in a market system.

Question 11

Voluntary exchange
A) will eliminate scarcity.
B) is a nonprice rationing device.
C) is trading so that the consumer and producers are better off.
D) never involves transactions costs.

Accepted Answer

Voluntary exchange is based on the idea that both the buyer and seller believe they will be better off after the trade has taken place. It involves trading goods or services with mutual agreement and consent, usually through a market mechanism. This allows for a more efficient use of resources and the satisfaction of individual wants and needs. However, it does not eliminate scarcity and may involve transaction costs such as search costs, bargaining costs, and information costs. Thus, option C is the most appropriate choice.

Question 12

Which of these would NOT be considered a middleman in a market?
A) A produce wholesaler
B) An apple farmer
C) A smartphone retailer
D) A fruit distributor

Accepted Answer

An apple farmer is not a middleman as they produce the product directly and sell it either to retailers or distributors. The others listed all act as intermediaries in the market by buying from producers and selling to consumers.

Question 13

In the price system,
A) prices are set by government action.
B) consumers alone set the price.
C) producers alone set the price.
D) prices are set by the interaction of supply and demand.

Accepted Answer

In the price system, prices are not set by government action, consumers alone, or producers alone. Prices are determined by the interaction of supply and demand, which reflects the preferences and behaviors of both producers and consumers in the market. This process is essential in allocating goods and resources efficiently in a market economy. Therefore, the correct choice is D).

Question 14

The price of milk increases. Which of the following is NOT part of the likely chain of events that follows from this price change?
A) Some milk consumers reduce their consumption of milk.
B) Milk producers increase their production of milk.
C) The producers of feed for dairy cows increase production.
D) The manufacturers of milking machines lay off some workers.

Accepted Answer

The increase in milk prices would lead to an increase in demand for milk, which would lead to an increase in production by milk producers. Increased production would require the use of more feed for dairy cows, leading to an increase in production by feed producers. However, the increase in milk prices should not have any direct effect on the manufacturers of milking machines, and should not lead to the layoff of some workers.

Question 15

The price system
A) is the voluntary exchange system used in the United States.
B) is old fashioned and is no longer used.
C) is used only in countries that are developing.
D) is used to set resource prices only.

Accepted Answer

The price system is the voluntary exchange system used in the United States and other market economies. It is a system whereby prices communicate information about the relative scarcity of goods and services, which in turn helps to allocate resources efficiently.

Question 16

The way we know what commodities are relatively scarce or abundant is through
A) transaction costs.
B) prices.
C) price ceilings.
D) price floors.

Accepted Answer

Prices reflect the relative scarcity or abundance of a commodity. If the price of a commodity is high, it indicates that the commodity is relatively scarce. Conversely, if the price of a commodity is low, it means that the commodity is relatively abundant. Therefore, prices provide information on the scarcity or abundance of a commodity.

Question 17

The price system has
A) prices fixed by the government.
B) prices fixed by the seller.
C) voluntary exchange.
D) prices fixed by the producer.

Accepted Answer

The price system relies on voluntary exchange, where buyers and sellers freely negotiate prices for goods and services. The government and producers do not fix the prices.

Question 18

In a price system, changes in prices
A) make it difficult for the system to function well.
B) imply that people have made mistakes in the past.
C) signal to everyone in the system what goods are relatively more or less scarce.
D) signal to policy makers what goods should and should not be taxed more.

Accepted Answer

Changes in prices signal to everyone in the system what goods are relatively more or less scarce. This helps individuals and businesses make decisions about what goods to produce, what goods to consume, and how resources should be allocated.

Question 19

Which of the following statements about markets is correct? I. A market helps resources move to their highest-valued uses by means of prices.
II) A market encompasses the exchange arrangements of both buyers and sellers.
A) I only
B) II only
C) Both I and II
D) Neither I nor II

Accepted Answer

Both statements are correct. Statement I correctly describes the function of a market by indicating that resources (goods, services, and factors of production) move to their highest-valued uses through the price mechanism. Statement II correctly characterizes a market by its exchange arrangements, which include the buyers and the sellers coming together and negotiating on the terms of exchange.

Question 20

In a market system, which component conveys information about what is relatively scarce and what is relatively abundant?
A) The number of producers
B) The number of consumers
C) Prices
D) The amount of government regulation

Accepted Answer

Prices convey information about what is relatively scarce and abundant in a market system. When a product or service is scarce, the price tends to increase, signaling to producers that they should increase production in order to meet the demand. On the other hand, when a product or service is abundant, the price tends to decrease, signaling to producers that they should decrease production or shift their resources to other areas. This feedback mechanism helps to allocate resources more efficiently in the market.

Quiz 4: Extensions of Demand and Supply Analysis

Which of the following is NOT a device to reduce transaction costs?

Specialists who try to lower transaction costs are

The signaling aspect of the market system refer to

The signals in markets are determined

An economic system in which relative prices change to reflect changes in supply and demand for different commodities is known as a

In a market system, the costs associated with exchanging goods are known as

In a market system, intermediaries in the exchange process are known as

The price system features

Which of the following is NOT an example of a transaction cost?

In a market system, what must take place for quantity demanded to continually be equated with quantity supplied?

Voluntary exchange

Which of these would NOT be considered a middleman in a market?

In the price system,

The price of milk increases. Which of the following is NOT part of the likely chain of events that follows from this price change?

The price system

The way we know what commodities are relatively scarce or abundant is through

The price system has

In a price system, changes in prices

Which of the following statements about markets is correct? I. A market helps resources move to their highest-valued uses by means of prices. II) A market encompasses the exchange arrangements of both buyers and sellers.

In a market system, which component conveys information about what is relatively scarce and what is relatively abundant?