Deck 2: The Market System and the Circular Flow

Question 1

Selfishness and self-interest are identical concepts in economics.

Answer 1

False

Question 2

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

Answer 2

False

Question 3

An important aspect of the market system is that producers and consumers always have to consider the public interest in making production and consumption decisions.

Answer 3

False

Question 4

Costs can be defined as total payments made to workers, landowners, and capital suppliers less payments to the entrepreneur for organizing and combining the other resources used to produce a good.

Question 5

Central planning in the Soviet Union and pre-reform China emphasized expanding the production of consumer goods to raise the domestic standard of living.

Question 6

The invisible hand refers to the many indirect controls that the federal government imposes in a market system.

Question 7

Property rights give the government the right to own, use, and dispose of resources in an economy.

Question 8

Money functions as a medium of exchange by eliminating the need for a coincidence of wants.

Question 9

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

Question 10

Most market economies, such as the U.S. and the U.K., allow government policies and actions aimed at promoting economic growth and stability.

Question 11

Property rights give to some people the right to coerce others into giving up their property.

Question 12

Market economies use capital goods because they improve productive efficiency.

Question 13

Central planning often suffers from a coordination problem and an incentive problem.

Question 14

The guiding function of prices tends to keep resources flowing toward their most highly valued uses.

Question 15

Consumer sovereignty means that legislation now protects the rights of consumers to dispose of their incomes as they see fit.

Question 16

A market system is characterized by the private ownership of resources and the use of prices to coordinate economic activity.

Question 17

The wants of consumers are expressed in the product market with "dollar votes."

Question 18

The economy of the United States can best be described as laissez-faire capitalism.

Question 19

Specialization may expand total output even though the individuals involved may have identical abilities.

Question 20

Continued losses in an industry will cause some firms to reduce output or eventually leave the industry.

Question 21

In a market system, the distribution of goods and services largely depends on the distribution of income and people's preferences.

Question 22

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

Question 23

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

Question 24

In a market system, a consumer's ability to pay-but not necessarily his willingness to pay-is largely based on his income.

Question 25

According to the circular flow model of the market system, firms get their ability to pay for their costs of production from the revenues that they receive for their products.

Question 26

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

Question 27

The fundamental economic question regarding the distribution of output in the economy is equivalent to the question of who will produce the output.

Question 28

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

Question 29

Quantitative measures of managerial success, such as production targets or quotas, are highly foolproof and are thus ideal to use in increasing economic efficiency.

Question 30

One of the most important economic resources is money.

Question 31

The problems of central planning become less complex as an economy expands over time.

Question 32

Economic efficiency entails producing a certain output with the minimum number of units of inputs.

Question 33

In a market system, entrepreneurs start businesses in order to earn a high salary.

Question 34

In analyzing a market system, economists often assume that firms will choose the production techniques that will give them maximum revenues.

Question 35

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

Question 36

Profits are the primary "success indicator" for firms in a centrally planned economy.

Question 37

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

Question 38

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

Question 39

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.

Question 40

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.

Question 41

Which of the following is a distinguishing feature of a command system?

A)private ownership of all capital
B)central planning
C)heavy reliance on markets
D)widespread dispersion of economic power

Question 42

If the total costs of producing 1,500 units of output is $12,000 and this output sold to consumers for a total of $15,000, then the firm would earn economic profits of

A)$15,000.
B)$18,000.
C)$3,000.
D)$12,000.
E)$27,000.

Question 43

Of the following countries, which one best exhibits the characteristics of a market economy?

A)Canada
B)Cuba
C)North Korea
D)Belarus

Question 44

Which of the following is not a typical characteristic of a market system?

A)freedom of choice
B)competition in product and resource markets
C)consumer sovereignty
D)lack of incentives to produce new products
E)profit as a success indicator

Question 45

Low-cost production is not important for Bitcoin miners since Bitcoin is intangible and exists only in cyberspace.

Question 46

South Korea has always been more prosperous than North Korea, even before 1953.

Question 47

Which of the following is one of the Five Fundamental Questions?

A)Which products should be subsidized?
B)How will the goods and services be produced?
C)How much should society save?
D)Which products should be taxed?

Question 48

Examples of command economies are

A)the United States and Japan.
B)Sweden and Norway.
C)Mexico and Brazil.
D)Cuba and North Korea.

Question 49

Which of the following is a characteristic of a corporation?

A)It is an independent legal entity on its own.
B)The owners bear all the responsibility of the business's debts.
C)It is owned and managed by one person.
D)The 2 owners pool their business talents to run the business.

Question 50

Government bailouts of failing businesses, like banks during the 2008 financial crisis, will tend to reduce the motivation among entrepreneurs to make prudent decisions in dealing with business risk.

Question 51

When somebody buys an insurance policy, that person is seeking to transfer risk away from herself and pass it on to the insurance company.

Question 52

Which of the following is a distinguishing feature of laissez-faire capitalism?

A)public ownership of all capital
B)central planning
C)minimal government intervention
D)a circular flow of goods, resources, and money

Question 53

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

A)Self-interest applies only to consumers, not to entrepreneurs.
B)Self-interest of entrepreneurs implies seeking maximum profits or minimum losses.
C)Self-interest usually motivates an individual to deliver something of value to others.
D)In a market system, self-interest motivates property owners to try to get the highest rent or price for their property.

Question 54

Private property

A)does everything indicated in the other choices.
B)encourages owners to maintain or improve their property to preserve or enhance value.
C)discourages innovation as people are often afraid to risk losing their own property.
D)discourages cooperation because people don't want to part with what they own.

Question 55

Answer the question based on the following information: Suppose 30 units of product A can be produced by employing just labor and capital in the four ways shown below. Assume the prices of labor and capital are $4 and $3, respectively. Which technique is economically most efficient in producing A?

A)III
B)II
C)I
D)IV

Question 56

Without government subsidized property insurance, people are more likely to be cognizant of the risks of building and living in fire-prone or flood-prone areas because their insurance costs will be higher.

Question 57

College graduates who dislike business risk will mostly seek to be hired by firms as labor, rather than starting their own firms as entrepreneurs.

Question 58

Having a high fixed salary is what motivates entrepreneurs to make prudent decisions in dealing with business risk.

Question 59

Answer the question based on the following information: Suppose 10 units of product A can be produced by employing just labor and capital in the four ways shown below. Assume the prices of labor and capital are $2 and $3, respectively. If the price of product A is $1.00, and the firm is producing efficiently the firm will realize

A)Economic profit of $10.
B)Economic profit of $23.
C)Economic loss of $13.
D)Economic loss of $3.
E)Economic profit of $3.

Question 60

Answer the question based on the following information: Suppose 10 units of product X can be produced by employing just labor and capital in the three ways shown below. Assume the prices of labor and capital are as shown. Which technique is the most economically efficient?

A)Technique I with total costs of $18
B)Technique I with total costs of $17
C)Technique III with total costs of $13
D)Technique II with total costs of $15

Question 61

Which of the following is not a typical characteristic of a market system?

A)private property
B)freedom of enterprise
C)government ownership of most property resources
D)competition in product and resource markets

Question 62

Broadly defined, competition involves

A)private property and freedom of expression.
B)independently acting buyers and sellers and freedom to enter or leave markets.
C)increasing opportunity costs and diminishing marginal utility.
D)capital goods and division of labor.

Question 63

Command systems are also known as

A)market systems.
B)pure capitalism.
C)laissez-faire capitalism.
D)communism.

Question 64

Economic systems differ according to which two main characteristics?

A)who owns the factors of production and the methods used to coordinate economic activity
B)the technology used in production and the quantity and quality of natural resources
C)how goods are produced and who gets them
D)the political system in place and the degree of scarcity facing the economy

Question 65

On the basis of the information, it can be said that

A)no coincidence of wants exists between any two states.
B)a coincidence of wants exists between Michigan and Washington.
C)a coincidence of wants exists between Texas and Washington.
D)a coincidence of wants exists between Michigan and Texas.

Question 66

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 society to trade by barter.
D)allows society to have fewer capital goods.

Question 67

Specialization-the division of labor-enhances productivity and efficiency by

A)allowing workers to take advantage of existing differences in their abilities and skills.
B)avoiding the time loss involved in shifting from one production task to another.
C)allowing workers to develop skills by working on one, or a limited number, of tasks.
D)all of the means identified in the other answers.

Question 68

The main mechanism that regulates the market system is

A)self-interest.
B)private property.
C)competition.
D)freedom of enterprise and choice.

Question 69

The division of labor means that

A)labor markets are geographically segmented.
B)unskilled workers outnumber skilled workers.
C)workers specialize in various production tasks.
D)each worker performs a large number of tasks.

Question 70

A fundamental difference between the command system and laissez-faire capitalism is that, in command systems,

A)the division of output is decided by central planning rather than by individuals operating freely through markets.
B)all economic decisions are made by the government, whereas there is no government in laissez-faire capitalism.
C)scarcity does not exist, whereas it does in laissez-faire capitalism.
D)money is not used, whereas it is in laissez-faire capitalism.

Question 71

Freedom of enterprise

A)is a characteristic that is common to most economic systems.
B)in a market system means that entrepreneurs can obtain and use economic resources without any legal restraint.
C)allows businesses, within broad limits, to choose what goods to produce.
D)refers primarily to the right of consumers to purchase what they want.

Question 72

Copyrights and trademarks are examples of

A)capital goods.
B)human capital.
C)property rights.
D)public goods.

Question 73

Specialization in production is economically beneficial primarily because it

A)allows everyone to have a job that he or she likes.
B)permits the production of a larger output with fixed amounts of resources.
C)facilitates trade by bartering.
D)guarantees full employment.

Question 74

The term "laissez-faire" suggests that

A)land and other natural resources should be privately owned, but capital should be publicly owned.
B)land and other natural resources should be publicly owned, but capital should be privately owned.
C)government should not interfere with the operation of the economy.
D)government action is absolutely necessary if the economy is to achieve full employment and full production.

Question 75

Property rights are important because they

A)ensure an equal distribution of income.
B)encourage cooperation by improving the chances of mutually agreeable transactions.
C)guarantee that any exchange will make all parties better off than prior to the exchange.
D)allow the government to control how resources are allocated.

Question 76

The French term "laissez-faire" means

A)"there is no free lunch."
B)"let it be."
C)"circular flow."
D)"public ownership."

Question 77

Competition means that

A)sellers can manipulate market price by causing product scarcities.
B)there are independently acting buyers and sellers in each market.
C)a product can be purchased at a number of different prices.
D)there is more than one seller in a market.

Question 78

Private property

A)discourages cooperation because people don't want to part with what they own.
B)discourages innovation, as people are often afraid to risk losing their own property.
C)encourages owners to maintain or improve their property to preserve or enhance value.
D)does everything indicated by the other answers.

Question 79

Which of the following is a fundamental characteristic of the market system?

A)property rights
B)central planning by government
C)unselfish behavior
D)government-set wages and prices

Question 80

An economic system

A)requires a grouping of private markets linked to one another.
B)is a particular set of institutional arrangements and a coordinating mechanism used to respond to the economizing problem.
C)requires some sort of centralized authority (such as government)to coordinate economic activity.
D)is a plan or scheme that allows a firm to make money at some other firm's expense.