Question 1

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

Accepted Answer

The idea that the desires of resource suppliers and firms to further their own self-interest will automatically further the public interest is known as the invisible hand. It means that by pursuing their own interests, individuals and firms will unknowingly promote the general welfare of society as a whole.

Question 2

"For whom is a given mix of goods and services to be produced? How, in other words, are the society's outputs to be distributed among its members?" In a market economy, this question is resolved primarily in the:

Accepted Answer

In a market economy, the distribution of goods and services is primarily determined by the private sector through the earning and spending of income. Individuals and businesses make choices on what to produce and consume based on their own self-interest and ability to pay. Government intervention may occur through taxation and regulation, but ultimately the market forces of supply and demand drive the distribution of goods and services. The other options listed (central planning, advertising, money market) are not the primary mechanisms for determining the distribution of outputs in a market economy.

Question 3

In a market economy, the incomes of consumers depend primarily upon:

Accepted Answer

In a market economy, the incomes of consumers are primarily determined by the quantity and prices of resources that they possess. This includes their skills, education, and experience which determine the wages they can earn in the labor market, and their financial assets which generate income through interest and investment returns. The government may influence incomes through policies such as minimum wage laws, but ultimately it is the market forces of supply and demand that determine wages and prices. Savings may contribute to a person's income, but it is not the primary factor determining it. Connection to government and business leaders may provide opportunities for higher incomes in some cases but is not a general rule for all consumers.

Question 4

The "invisible hand" concept refers to the:

Accepted Answer

The "invisible hand" concept, coined by Adam Smith, refers to the guiding function of prices in a market system where self-interested individuals, acting independently, will unknowingly promote the general welfare of society through their economic transactions. This means that prices will adjust to balance supply and demand, and individuals will make choices that benefit themselves while contributing to the overall functioning of the economy.

Question 5

The following table illustrates alternative production techniques for producing 18 widgets that can be sold for $1 each for a total revenue of $18.  Refer to the above table. At the $3 price for labor the most efficient technique will result in an:

Accepted Answer

The most efficient technique when labor costs $3 is Technique 2, which has a total cost of $16 and a total revenue of $18, resulting in an economic profit of $2. Therefore, the best choice is to use Technique 2 to produce the 18 widgets.

Question 6

Capital accumulation in a market system results from:

Accepted Answer

Capital accumulation in a market system results from dollar votes by entrepreneurs and business owners. These individuals decide how to allocate their resources based on their perception of market demand and potential profit. They invest in expanding their businesses by purchasing more machinery, buildings, and hiring additional employees, resulting in capital accumulation. Increased purchases of consumers or households are a result of capital accumulation, not the cause of it. The "invisible hand" that guides the market and consumer sovereignty that prevails in the market are guiding principles but not direct causes of capital accumulation.

Question 7

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

Accepted Answer

The concept of the "invisible hand" suggests that in a market system, individual self-interest will lead to the promotion of the public interest, without the need for government intervention or regulation. This idea was developed by economist Adam Smith in his book "The Wealth of Nations", and is a key principle of free market economics.

Question 8

The highly influential book by Adam Smith, who brought up the "invisible hand" notion, is titled:

Accepted Answer

The Wealth of Nations is the highly influential book by Adam Smith, first published in 1776, that brought up the concept of the "invisible hand" and laid the foundation for modern economics. A) The Worldly Philosophers is a book by Robert Heilbroner that provides an overview of the ideas of economists throughout history. B) The Affluent Society is a book by John Kenneth Galbraith that examines the economic and social changes that occurred after World War II. C) The Age of the Economist is a book by Daniel R. Fusfeld that provides an overview of the history of economic thought.

Question 9

Which of the following does not illustrate the idea of creative destruction?

Accepted Answer

The destruction of expired products in a firm's inventory is not a part of creative destruction, as it doesn't involve the replacement or elimination of a particular product or market by a newer and more innovative one. Rather, it is a routine business practice to maintain quality control and meet regulatory compliance.

A, B, and C are all examples of creative destruction, where new technological or market innovations disrupt the existing ones and create new opportunities for growth and innovation.

Question 10

The distribution of income in a market system is a primary factor that resolves which of the following fundamental economic questions?

Accepted Answer

The distribution of income determines who will receive the output or the goods and services produced in the market system, which resolves the fundamental economic question of "Who will get the output?" This question pertains to the distribution aspect of the market system, while the other options relate to production, efficiency, and adaptation principles.

Question 11

An increase in the demand for a product and a reduction in its costs of production would:

Accepted Answer

An increase in demand for a product would lead to increased sales and revenue for firms producing that product. If the cost of production also declines, firms would experience an increase in profits. This would incentivize new firms to enter the market in order to capitalize on the higher profits available. Therefore, choice C is the correct answer. Option A is incorrect because an increase in demand and a reduction in costs would lead to increased profits. Option B is incorrect because a reduction in production costs would encourage firms to stay in the industry rather than leave. Option D is incorrect because an increase in demand and a reduction in costs would make it less likely for a shortage to occur.

Question 12

In a market system, resources will move away from an industry when:

Accepted Answer

In a market system, resources will move away from an industry when the demand for the industry's product is decreasing. This is because it indicates that there is less demand for the goods or services produced by the industry, which will lead to lower revenues and profits. As a result, firms in the industry will have less money to pay for resources, and resource suppliers will seek opportunities in other industries with higher demand and better long-term prospects.

Question 13

The development of the digital video and camera which replaced film cameras is an example of:

Accepted Answer

The development of the digital video and camera led to the decline and eventual obsolescence of film cameras, which can be seen as an example of creative destruction - the process by which new innovations replace older ones in the market.

Question 14

"Creative destruction" in a market system is brought about by:

Accepted Answer

"Creative destruction" refers to the process by which innovation and new business ideas replace outdated or inefficient ones in a market system. This process is largely driven by entrepreneurs who are willing to take risks, break with tradition, and explore new markets or technologies. Striking workers may be able to exert some temporary pressure on businesses, but they do not generally bring about creative destruction. Government regulation can sometimes have a role in shaping market outcomes, but it is typically not the driving force behind creative destruction. Money-based trade is a necessary feature of any market system, but it is not the root cause of creative destruction.

Question 15

The market system communicates changes in market conditions and elicits appropriate responses from businesses and resource suppliers through changes in prices. This is known as the:

Accepted Answer

The guiding function of prices refers to how prices act as signals to businesses and resource suppliers to adjust their production and resource allocation decisions in response to changing market conditions. This is a fundamental aspect of the market system and allows for efficient allocation of resources according to consumer demand.

Question 16

The following table illustrates alternative production techniques for producing 18 widgets that can be sold for $1 each for a total revenue of $18.  Refer to the above table. If the price per unit of labor were to increase from $2 to $3, the most efficient production technique would then be:

Accepted Answer

When the price per unit of labor increases from $2 to $3, the cost of production increases for all the techniques. However, technique C has the lowest total cost of production with $16.5, which is still less than the revenue of $18 for producing 18 widgets. Therefore, technique C remains the most efficient choice even with the increased price of labor.

Question 17

In a market system, the distribution of goods and services among consumers is largely determined by:

Accepted Answer

In a market system, goods and services are distributed based on the willingness and ability of consumers to pay. This means that those who are able and willing to pay the price for a good or service get to access it, while those who cannot or will not pay do not. This creates a system where supply and demand determine the allocation of resources.

Question 18

If economic profits in a particular industry increase, then we would expect:

Accepted Answer

Economic profits in an industry indicate that there is high demand for the goods or services provided by the industry and that the industry is relatively inefficient in producing those goods or services. This means that firms in other industries are likely to see the opportunity for profits and enter the industry, thus expanding it.

Question 19

The major virtues of the market system include all of the following, except:

Accepted Answer

The market system does not necessarily lead to equality in the distribution of income. In fact, the market system tends to reward those who are more productive or have valuable skills, which can result in income inequality.

Question 20

In a market system, as one industry expands while another contracts, resources will flow:

Accepted Answer

In a market system, resources flow from one industry to another due to changes in resource prices paid by firms. As the expanding industry demands more resources, the prices of those resources increase, making it more profitable for firms in other industries to redirect their resources towards the expanding industry. Similarly, as the contracting industry demands fewer resources, the prices of those resources decrease, making it less profitable for firms to remain in that industry. Therefore, resources flow from one industry to another based on changes in relative prices.

Quiz 2: The Market System and the Circular Flow