Economics 252

Review Questions - Chapter 4 – The Market System

(1) Which of the following is a fundamental characteristic of the market system?

(a) Property Rights.

(b) Central Planning by government.

(c) Freedom of enterprise is regulated and restricted by government.

(d) Public ownership of property.

(2) Well-defined property rights:

(a) discourage investment and growth.

(b) discourage hard work.

(c) impede exchange.

(d) encourage owners to maintain or improve their property.

(3) Specialization in production is important primarily because it:

(a) results in greater total output.

(b) allows society to avoid the coincidence-of-wants problem.

(c) allows individuals in society to become self-sufficient and produce all goods and services for themselves or family units.

(d) reduces the need for trade among individuals and regions within the country.

(4) Which of the following is not an economic cost?

(a) Wages.

(b) Rents.

(c) Economic profits.

(d) Normal profits.

(5) Economic profits in an industry suggests the industry:

(a) is not earning a normal profit for entrepreneurs in that industry.

(b) should be larger to better satisfy consumer demand.

(c) has excess production capacity.

(d) is the size that consumers want it to be.

(6) Market systems accommodate change through:

(a) government directed resource shifts from declining to expanding industries

(b) resource allocation through the guiding system of prices.

(c) the rapid spread of technological change, directed by government.

(d) the allocation of capital by central planning agencies who understand the needs for capital for each industry.

Consider the information in Table 1 in answering Questions (7) and (8) below.

Table 1

Resource Possible production techniques (resource units required)

Resource Required Prices #1 #2 #3 #4 #5

Land $4 2 4 2 4 4

Labor $3 1 2 4 1 3

Capital $3 5 2 3 1 2

Entrepreneurial ability $2 3 1 1 4 1

(7) Considering Table 1, what is (are) the economically most efficient production technique(s)?

(a) #1

(b) #2 and #4

(c) #3

(d) #1 and #3

(8) Assume that in Table 1, the resource requirements allow a typical firm to produce 20 units of the commodity, and the commodity can be sold for $2 per unit. Which of the following statements would be correct for this industry?

(a) Firms in this industry will find that firms in other industries are able to outbid them for resources.

(b) The industry will contract as firms are forced out of business.

(c) The industry will expand as new firms enter.

(d) The industry is in equilibrium in that there is no reason for it to expand or contract.

(9) The market system’s answer to the fundamental question “Who will get the goods and services?” is essentially:

(a) “Those willing and able to pay for them”.

(b) “Those who physically produced them”.

(c) “Those who most need them”.

(d) “Those who get satisfaction from their use”.

(10) The “invisible hand” concept suggests that:

(a) changes in product demands are only randomly reflected in changes in the demands for resources.

(b) profit maximization is inconsistent with an efficient allocation of resources.

(c) government action is necessary to make the economy to perform efficiently.

(d) when firms maximize their profits, society’s output will also be maximized.