Econ 201 Ch. 2- The Market System

Economic systems differ from one another based on who own the factors of production and:

Who make decisions regarding what to produce and how it is produced

Which of the following would be primarily determined in the resource markets?

The wage rates for computer programmers and engineers

The government may impose industrial safety regulations and occupational licensing requirements in which of the following economic systems?

Mixed market economy

By freedom of enterprise, we mean that individual:

Firms are free to employ resources, to produce their output, and to sell their products

According to the circular flow model of the market system, when resource-owners’ money income is rising, then the costs to business firms must be falling.

False

Anything that is generally acceptable in trading for goods and services is a:

Medium of exchange

In a capitalist system, the decisions and actions of millions of consumers and firms are highly coordinated by:

Markets and prices

A corporation is a type of business firm where the debt of the firm is considered its owners’ personal responsibility.

False

Capital accumulation in a market system results from:

Dollar votes by entrepreneurs and business owners

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:

C) Labor: 1 Land: 3 Capital: 2 Entrepreneurship: 1

In the circular flow model of the market system, business firms:

Sell products and buy resources

Insurance companies facilitate the transfer of risk from:

Those who have a low-risk tolerance to those with high risk-tolerance

Which of the following would not be emphasized in a capitalist economy?

Prevention of owners of capital from exposing this resource to risk

Competition is more likely to exist when:

There is easy entry into and exit out of industries

Maximum profits are what motivate consumers to decide who will get the goods and services in a market system.

False

What, according to economist Donald Boudreaux in the "Last Word" section of the chapter, best explains why the market system is not a random, chaotic mess?

Private property rights encourage mutual accommodation that leads to an arrangement of resources that is productive

Refer to the above figure. If box A represents households, D the resource market, and C businesses, then flow (8) would represent ___ while flow (7) would represent ___.

Money income; resources

If people tried to produce as much of what they need on their own, then this would lead to a more efficient use of the economy’s resources.

False

Refer to the above figure. If box A represents households, B the product market, and C businesses, and if flow (3) represents revenues, then flow (1) would represent:

Consumption expenditures

Which of the following statements about the right to private ownership is false?

It weakens the incentive to maintain the property that one already owns

The "invisible hand" concept refers to the:

Guiding function of prices in a market system

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

Self-interest in a market system will automatically promote the public interest as well

Private ownership and property rights in a market system have the following implications, except:

Large firms are allowed to coerce other firms and individuals

The concept of consumer sovereignty refers to the situation where consumers have the right to vote for the board of directors of large corporations.

False

In a market system, the task of assessing and managing the business risk of a firm is taken on by the firm’s:

Entrepreneurs

Even with the use of money, exchange and trade cannot occur if there is no coincidence of wants.

False

In a command economy, the head of each household makes the fundamental economic choices such as what to produce and how to produce output.

False

A required element for specialization to lead to an increase in the satisfaction of society’s wants is:

Exchange and trade

Competition in a market system denotes a condition where:

The diffusion of economic power limits its potential abuse

Being a "jack-of-all-trades" implies reducing the reliance on the division of labor.

True

In a market system, the income earned by owners of natural resources is called interest income.

False

One major element of the command system is:

Central planning conducted by the government

Suppose a firm can produce 70 units of a product, Zenia, by combining labor, land, capital, and entrepreneurial ability, as in the four alternative techniques shown in the table below. Assume further that the firm can hire labor at $3 per unit, land at $3 per unit, capital at $6 per unit, and entrepreneurship at $9 per unit.

Refer to the above table. Which technique is the most economically efficient way of producing Zenia?

D) Labor: 5 Land: 3 Capital: 4 Entrepreneurship:1

A characteristic of the market system is:

Reliance on the use of capital goods to expand total output

McDonald’s introduced the "Big Mac" in 1968 and it turned out to be a hit, but the "Arch Deluxe" introduced in 1996 was not. The success or failure of a product in the market system is determined by:

Consumer sovereignty and dollar votes

The production technique that is most efficient is the one that produces a given amount of output:

at the lowest cost per unit

Which is true of an economy which operates entirely through central planning?

Individual economic incentive is reduced by the absence of the profit motive

International specialization and trade:

Often requires the exchange of currencies

Suppose a firm can produce 70 units of a product, Zenia, by combining labor, land, capital, and entrepreneurial ability, as in the four alternative techniques shown in the table below. Assume further that the firm can hire labor at $3 per unit, land at $3 per unit, capital at $6 per unit, and entrepreneurship at $9 per unit.

Refer to the above table, and suppose that the firm uses production technique D. If each of the 70 units of Zenia that are produced sells for $1 apiece, then how much will be the profits of the firm from 70 units?

$13

Which of the following statements about self-interest in a market system is false?

Self-interest applies only to capitalists and entrepreneurs, not to workers employed by others

Even if prices are fixed and competition is restricted by the government, the "invisible hand" will still work in the economy and lead to economic efficiency.

False

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

Encourage firms to enter an industry

In the circular flow model, households act as buyers in the resource markets.

False

The choice of the most efficient production technique is not affected by how much buyers want to buy the product.

True

The market economy is regarded as "efficient" in that:

It directs resources towards products that the society wants most

Which of the following is necessary to make a trade in a barter economy?

A coincidence of wants

Which of the following is not one of the five fundamental questions that an economy must deal with?

Why should the goods and services be produced?

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

Creative destruction

Why might a company use barter rather than money to make a trade?

Barter can enable two firms to trade when their cash flows are limited

In a competitive market economy, firms and resource suppliers seeking to further their own self-interest will end up, as though guided by an "invisible hand," promoting the public interest.

True