Question 1

Command economies are able to achieve greater allocative efficiency than market economies.

Accepted Answer

A) True 
 B)False  False

Question 2

After the Arab oil embargoes, there was concern about the impact of higher gas prices on the low-income worker.The government imposed price controls on oil to protect the poor from this situation.Explain the inefficiency of this price ceiling and how taxes, rather than prices, could be used to solve the problem.

Accepted Answer

By preventing the price of gas from rising to its new equilibrium, gas could not be allocated to those most willing to pay.Hence, long lines formed and gas was rationed by waiting time rather than solely by price.In some cases, producers were able to extract higher amounts from those most willing to pay.By selling only to "regular customers" or to those willing to buy overpriced car washes, the wealthy could get gas while the poor did without or experienced very long waits.The alternative is to let the market price the gas and use the tax system to redistribute income to the poor to offset their loss in purchasing power due to higher gas prices.This allows rich and poor to put their money where they get the most marginal utility.

Question 3

The MU of computers is initially larger than the MC of producing them in a free market.We may expect output of computers to

Accepted Answer

A)  fall, MC to rise, and MU to rise. 
B)  rise, MC to fall, and MU to fall. 
C)  rise, MC to rise, and MU to fall. 
D)  fall, MC to fall, and MU to rise. 
A)  fall, MC to rise, and MU to rise. 
B)  rise, MC to fall, and MU to fall. 
C)  rise, MC to rise, and MU to fall. 
D)  fall, MC to fall, and MU to rise. C

Question 4

Politicians always agree with economists about the most efficient way of doing things.

Accepted Answer

A) True 
 B)False

Question 5

An economist would say the price is too high for a certain service if

Accepted Answer

A)  poor people couldn't afford to buy it. 
B)  nobody could afford to buy it. 
C)  the price was above marginal cost. 
D)  it is an essential service and consumes a significant share of income. 
A)  poor people couldn't afford to buy it. 
B)  nobody could afford to buy it. 
C)  the price was above marginal cost. 
D)  it is an essential service and consumes a significant share of income.

Question 6

The perfect competition price system is the most efficient because it equates MC = P = MU.

Accepted Answer

A) True 
 B)False

Question 7

There is only one efficient allocation of resources in an economy at one point in time.

Accepted Answer

A) True 
 B)False

Question 8

Many persons object to the results of the competitive market system because

Accepted Answer

A)  it takes too much energy to coordinate activities. 
B)  efficient outcomes may not be compatible with their ideas of a fair distribution. 
C)  a few people can control all economic activity. 
D)  it fosters high rents and low beef prices. 
A)  it takes too much energy to coordinate activities. 
B)  efficient outcomes may not be compatible with their ideas of a fair distribution. 
C)  a few people can control all economic activity. 
D)  it fosters high rents and low beef prices.

Question 9

The technique called input-output analysis was invented by

Accepted Answer

A)  Adam Smith. 
B)  Milton Friedman. 
C)  Wassily Leontief. 
D)  Mountifort Longfield. 
A)  Adam Smith. 
B)  Milton Friedman. 
C)  Wassily Leontief. 
D)  Mountifort Longfield.

Question 10

The assignment of inputs to specific industries by central planners is made difficult by

Accepted Answer

A)  the interdependency among industries. 
B)  lack of data for decision making. 
C)  the danger of a chain reaction among industries if an error is made at any point. 
D)  All of the above are correct. 
A)  the interdependency among industries. 
B)  lack of data for decision making. 
C)  the danger of a chain reaction among industries if an error is made at any point. 
D)  All of the above are correct.

Question 11

Prices are useful in coordinating society's economic planning because

Accepted Answer

A)  they convey information about which goods are scarce and which are plentiful. 
B)  economies based on price systems are more flexible than centrally planned economies. 
C)  economies based on price systems are more likely than centrally planned economies to minimize the cost of producing society's output. 
D)  All of the above are correct. 
A)  they convey information about which goods are scarce and which are plentiful. 
B)  economies based on price systems are more flexible than centrally planned economies. 
C)  economies based on price systems are more likely than centrally planned economies to minimize the cost of producing society's output. 
D)  All of the above are correct.

Question 12

In many cities, the price of summer pops concerts has risen.In Charlotte, North Carolina, and Columbus, Ohio, for example, concerts that were once free now cost $5.If there are only fixed costs and no variable costs nor marginal costs in an orchestra concert, what is the efficient price? Explain the reason why some people will find the efficient price unfair.

Accepted Answer

If MC = 0, then the performances should

Question 13

When an economy operates efficiently,

Accepted Answer

A)  the MRPs of every input into the production of a good are equal. 
B)  marginal utility equals marginal cost for every good. 
C)  the price of a good equals the sum of the marginal physical products of its inputs. 
D)  All of the above are correct. 
A)  the MRPs of every input into the production of a good are equal. 
B)  marginal utility equals marginal cost for every good. 
C)  the price of a good equals the sum of the marginal physical products of its inputs. 
D)  All of the above are correct.

Question 14

How does a free-market system address the output selection task?

Accepted Answer

A free-market system decides what should

Question 15

The basic forces driving the "invisible hand" are

Accepted Answer

A)  government and business. 
B)  information and computer technology. 
C)  competition and self-interest. 
D)  cooperation and altruism. 
A)  government and business. 
B)  information and computer technology. 
C)  competition and self-interest. 
D)  cooperation and altruism.

Question 16

Keeping landing fees low at airports during the "peak" hours

Accepted Answer

A)  perpetuates congestion during those hours. 
B)  is politically unpopular. 
C)  contributes to efficient allocation of airport facilities. 
D)  would lessen the problem of delayed flight landings. 
A)  perpetuates congestion during those hours. 
B)  is politically unpopular. 
C)  contributes to efficient allocation of airport facilities. 
D)  would lessen the problem of delayed flight landings.

Question 17

The idea of the invisible hand was introduced by

Accepted Answer

A)  Wassily Leontief. 
B)  Adam Smith. 
C)  Thomas Jefferson. 
D)  Mountifort Longfield. 
A)  Wassily Leontief. 
B)  Adam Smith. 
C)  Thomas Jefferson. 
D)  Mountifort Longfield.

Question 18

"Peak" pricing can best be defined as

Accepted Answer

A)  setting higher prices to reflect higher demand. 
B)  pricing to obtain maximum profit. 
C)  setting price higher when demand is more elastic. 
D)  raising price to determine elasticity. 
A)  setting higher prices to reflect higher demand. 
B)  pricing to obtain maximum profit. 
C)  setting price higher when demand is more elastic. 
D)  raising price to determine elasticity.

Question 19

In a free market, a given unit of an input will be used by the firm that

Accepted Answer

A)  earns the largest addition to total profit from the use of that unit of input. 
B)  has the lowest marginal cost of producing another unit of output. 
C)  sells its output for the highest price. 
D)  earns the largest total profit. 
A)  earns the largest addition to total profit from the use of that unit of input. 
B)  has the lowest marginal cost of producing another unit of output. 
C)  sells its output for the highest price. 
D)  earns the largest total profit.

Question 20

The introduction of a subsidy in a perfectly competitive marketplace that is originally in equilibrium will raise total surplus.

Accepted Answer

A) True 
 B)False

Exam 14: The Case for Free Markets I: The Price System

Command economies are able to achieve greater allocative efficiency than market economies.

The MU of computers is initially larger than the MC of producing them in a free market.We may expect output of computers to

Politicians always agree with economists about the most efficient way of doing things.

An economist would say the price is too high for a certain service if

The perfect competition price system is the most efficient because it equates MC = P = MU.

There is only one efficient allocation of resources in an economy at one point in time.

Many persons object to the results of the competitive market system because

The technique called input-output analysis was invented by

The assignment of inputs to specific industries by central planners is made difficult by

Prices are useful in coordinating society's economic planning because

When an economy operates efficiently,

How does a free-market system address the output selection task?

The basic forces driving the "invisible hand" are

Keeping landing fees low at airports during the "peak" hours

The idea of the invisible hand was introduced by

"Peak" pricing can best be defined as

In a free market, a given unit of an input will be used by the firm that

The introduction of a subsidy in a perfectly competitive marketplace that is originally in equilibrium will raise total surplus.

What Is Economics?

The Economy: Myth and Reality

The Fundamental Economic Problem: Scarcity and Choice

Supply and Demand: An Initial Look

Consumer Choice: Individual and Market Demand

Demand and Elasticity

Production, Inputs, and Cost: Building Blocks for Supply Analysis

Output, Price, and Profit: The Importance of Marginal Analysis

Securities: Business Finance, and the Economy: The Tail that Wags the Dog?

The Firm and the Industry under Perfect Competition

Monopoly

Between Competition and Monopoly

Limiting Market Power: Regulation and Antitrust

The Shortcomings of Free Markets

The Market's Prime Achievement: Innovation and Growth

Externalities, the Environment, and Natural Resources

Taxation and Resource Allocation

Pricing the Factors of Production

Labor and Entrepreneurship: The Human Inputs

Poverty, Inequality, and Discrimination

An Introduction to Macroeconomics

The Goals of Macroeconomic Policy

Economic Growth: Theory and Policy

Aggregate Demand and the Powerful Consumer

Demand-Side Equilibrium: Unemployment or Inflation?

Bringing in the Supply Side: Unemployment and Inflation?

Managing Aggregate Demand: Fiscal Policy

Money and the Banking System

Monetary Policy: Conventional and Unconventional

The Financial Crisis and the Great Recession

The Debate over Monetary and Fiscal Policy

Budget Deficits in the Short and Long Run

The Trade-Off between Inflation and Unemployment

International Trade and Comparative Advantage

The International Monetary System: Order or Disorder?

Exchange Rates and the Macroeconomy

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