Question 1

The term used to describe a situation in which markets do not allocate resources efficiently is

Accepted Answer

Market failure occurs when markets do not allocate resources efficiently. This can occur due to factors such as externalities, public goods, and monopolies. Economic meltdown refers to a severe economic crisis, while equilibrium and the invisible hand are concepts related to market efficiency rather than market failure.

Question 2

Prices direct economic activity in a market economy by

Accepted Answer

Prices play a vital role in a market economy as they act as signals that influence the actions of both buyers and sellers. Prices reflect the level of demand for a product or service and the available supply, and thus, guide buyers and sellers on how to allocate resources efficiently. For instance, when the price of a product increases, it signals to producers that there is a higher demand for that product, and they increase production to meet the demand. At the same time, buyers adjust their consumption levels as the higher price signals that the product has become relatively scarce. Therefore, prices help allocate resources effectively and efficiently in a market economy.

Question 3

If the price of visiting a doctor were fixed below the current price,then we would expect

Accepted Answer

The answer of If the price of visiting a doctor...

Question 4

If the price of a gallon of milk were fixed above the current price,then we would expect

Accepted Answer

If the price is fixed above the current market price, it becomes more expensive for consumers, leading to a decrease in the quantity demanded. Conversely, producers are willing to supply more at the higher price, leading to an increase in the quantity supplied.

Question 5

In a market economy,economic activity is guided by

Accepted Answer

In a market economy, economic activity is guided by the self-interest of individuals and businesses, and by the prices they are willing to pay and receive in voluntary transactions. Although the government and corporations may have some influence on the economy, they do not determine the allocation of resources or the distribution of goods and services. Likewise, central planners do not exist in a market economy, where individuals and businesses make their own decisions based on market signals and incentives.

Question 6

In an economy in which decisions are guided by prices and individual self-interest,there is

Accepted Answer

In an economy guided by prices and individual self-interest, market forces incentivize producers to allocate resources efficiently in order to maximize profits. This leads to the potential for achieving efficiency in production. However, this does not necessarily mean that efficiency will always be achieved, as there may be market inefficiencies or externalities that prevent optimal outcomes. Nonetheless, the potential for efficiency is greater than in a centrally-planned economy, where decisions are made by a central authority rather than by the interaction of individuals and markets guided by prices.

Question 7

The decisions of firms and households are guided by prices and self-interest in a

Accepted Answer

In a market economy, prices act as signals that guide firms and households in making decisions. Firms use prices to determine what goods and services to produce and in what quantities, while households use prices to decide how much to consume and how much to save or invest. Both firms and households act in their own self-interest, seeking to maximize profits or utility, respectively. The other options, command and centrally-planned economies, rely on government decision-making rather than market forces.

Question 8

Which of the following statements does not apply to a market economy?

Accepted Answer

In a market economy, government policies do not guide the decisions of firms and households. Rather, individuals and businesses are free to make their own choices and the market forces of supply and demand determine prices and production levels.

Question 9

To say that government intervenes in the economy to promote efficiency is to say that government is attempting to

Accepted Answer

When government intervenes in the economy to promote efficiency, its primary goal is to increase the overall size of the economic pie, or the total amount of goods and services produced in the economy. This can be done in a variety of ways, such as investing in infrastructure or education, promoting competition, or ensuring a stable and predictable business environment. While efforts to create a more fair distribution of income or change the way in which the economic pie is divided may be part of this broader goal, they are not the main focus of efficiency-promoting government interventions.

Question 10

For markets to work well,there must be

Accepted Answer

Property rights are essential for well-functioning markets because they allow individuals to own and exchange goods and services, which leads to efficient allocation of resources and economic growth. Market power, a central planner, or abundant resources are not necessary for well-functioning markets. In fact, market power and central planning can lead to distortions and inefficiencies, while abundant resources can lead to complacency and waste.

Question 11

A friend of yours asks you why market prices are better than government-determined prices.Because you understand economic principles,you say that market-determined prices are better because they generally reflect

Accepted Answer

Market prices are determined by the interaction of supply and demand, which helps to ensure that prices reflect both the value of a good to society (as demonstrated by the willingness of consumers to pay for it) and the cost of making it (as demonstrated by the willingness of producers to supply it). In contrast, government-determined prices may be based on political considerations or may not take into account market forces, which can lead to inefficiencies and misallocation of resources.

Question 12

Public policies

Accepted Answer

Public policies have the potential to improve both economic efficiency and equality. For example, policies that promote competition and innovation can lead to improved economic efficiency, while policies that address income inequality and provide access to education and healthcare can improve equality. However, it is important to recognize that there may be trade-offs between these goals and not all policies will have an equal impact on both.

Question 13

Prices usually reflect

Accepted Answer

Prices reflect both the value of a good to society, as determined by the demand for the good, and the cost to society of making the good, as determined by the supply of the good. This is the basis of the market economy.

Question 14

When the government prevents prices from adjusting naturally to supply and demand,

Accepted Answer

When the government prevents prices from adjusting naturally to supply and demand, it leads to a distortion in the market as resources are not allocated efficiently. Price controls can lead to shortages or surpluses of goods, and can also result in reduced quality. This adversely affects the allocation of resources in the economy, making it less efficient. Therefore, option B is the best choice.

Question 15

Which of the following could reduce economic efficiency?

Accepted Answer

Laws that encourage lawsuits could increase transaction costs and reduce economic efficiency. Policies that redistribute income can produce disincentives to work and reduce innovation and efficiency. Significant restrictions on international trade can lead to inefficient allocation of resources and reduced gains from trade. Therefore, all of the above options can reduce economic efficiency.

Question 16

A company that formerly produced software went out of business because too many potential customers bought illegally-produced copies of the software instead of buying the product directly from the company.This instance serves as an example of

Accepted Answer

The fact that the company went out of business due to illegal copies being sold suggests that property rights were not being adequately enforced. This means that the company could not protect its intellectual property and was not able to profit from its software. This shows the importance of protecting property rights for businesses to succeed.

Question 17

The government enforces property rights by

Accepted Answer

Providing police and courts is essential for enforcing property rights. These institutions are responsible for protecting individuals’ property from theft, damage, or trespassing. Property taxes (A) are a means of generating revenue for the government and are unrelated to property-rights enforcement. Forcing people to own property (C) is not consistent with the principles of individual freedom and property rights. Public parks and recreation facilities (D) are not directly related to property rights enforcement.

Question 18

In a market economy,who makes the decisions that guide most economic activity?

Accepted Answer

A market economy is decentralized, meaning individuals and businesses make decisions based on profit and self-interest. Firms produce goods and services in response to demand from households, who are the ultimate decision-makers as they determine what goods and services they want to consume based on their preferences and budgets. Therefore, both firms and households guide economic activity in a market economy. Government intervention may occur in certain situations, such as enforcing property rights or regulating certain industries, but in a true market economy, government intervention is limited.

Question 19

For which of the following problems can well-designed public policy enhance economic efficiency?

Accepted Answer

Well-designed public policy has the potential to enhance economic efficiency in both cases of externalities and market power. In the case of externalities, public policy can regulate or tax the negative externalities to reduce their social cost and encourage positive externalities to increase their social benefit. In the case of market power, public policy can regulate anti-competitive behavior, prevent monopolies or break them up, and promote competition to enhance economic efficiency.

Question 20

One reason we need government,even in a market economy,is that

Accepted Answer

The invisible hand, as described by Adam Smith, will only work in a perfect market with perfect information and no externalities. However, such a market doesn't exist, creating room for government intervention to address market failures, such as regulating monopolies, addressing externalities, and providing public goods. Hence, while a market economy can achieve many desired outcomes, government intervention is necessary to correct market failures and ensure the economy functions efficiently.

Quiz 1: Ten Principles of Economics