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What are the two general types of economic systems that exist today?

market systems and command systems.

2. 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. wide-spread dispersion of economic power

B. central planning.

3. Which of the following is a distinguishing feature of a market system?
A. public ownership of all capital.
B. central planning.
C. wide-spread private ownership of capital.
D. a circular flow of goods, resources, and money.

C. wide-spread private ownership of capital.

4. Examples of command economies are:
A. The United States and Japan.
B. Sweden and Norway.
C. Mexico and Brazil.
D. Cuba and North Korea.

D. Cuba and North Korea.

What is an economic system?

a particular set of institutional arrangements and a coordinating mechanism used to respond to the economizing problem.

What does the term laissez-faire suggest?

government should not interfere with the operation of the economy.

What economies does Economic scarcity apply to?

applies to all economies.

Economic systems differ according to what two main characteristics?

Who owns the factors of production, and the methods used to coordinate economic activity.

Command systems are also known as what?

communism.

A fundamental difference between the command system and the market system is that, in command systems:

the division of output is decided by central planning rather than by individuals operating freely through markets.

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

property rights.

The pursuit of self-interest:
A. is highly detrimental to the market system.
B. means the same as "selfishness."
C. is reflected in the behavior of firms, but not in the behavior of consumers.
D. gives direction to the market system.

D. gives direction to the market system.

What is the regulatory mechanism of the market system?

competition

Broadly defined, what does competition involve?

independently acting buyers and sellers and freedom to enter or leave markets.

What does competition mean?

there are independently-acting buyers and sellers in each market.

What does the division of labor mean?

workers specialize in various production tasks.

Why is specialization in production primarily important?

because it results in greater total output.

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.

D. all of the means identified in the other answers.

Specialization in production is economically beneficial primarily because it:

permits the production of a larger output with fixed amounts of resources.

Barter

entails the exchange of goods for goods.

The use of money contributes to economic efficiency because:

it promotes specialization by overcoming the problems with barter.

The presence of market failures implies that:

there is an active role for government, even in a market system.

Which of the following is one of the Five Fundamental Questions?
A. Which products will be in scarce supply and which in excess supply?
B. Who should appoint the head of the central bank?
C. How much should the society save?
D. What goods and services will be produced?

D. What goods and services will be produced?

Which of the following is not an economic cost?
A. wages.
B. rents.
C. economic profits.
D. payments made to the entrepreneur for organizing production.

C. economic profits.

If competitive industry Z is making substantial economic profit, output will:

expand in industry Z, as more resources will move to that industry.

From society's point of view the economic function of profits and losses is to:

reallocate resources from less desired to more desired uses.

In a market economy a significant change in consumers' desire for product X will:
A. alter the profits or losses received by certain firms.
B. cause a reallocation of scarce resources.
C. cause some industries to expand and others to contract.
D. do all of these.

D. do all of these.

Economic profits in an industry suggest the industry:

should be larger to better satisfy consumers' desire for the product.

Economic profits and losses:

are essential to the reallocation of resources from less desired goods to more desired goods.

If consumer desire for product X increases, all of the following will occur except:
A. an increase in the profits of industry X.
B. an increase in the quantity of resources employed by industry X.
C. an increase in the output of industry X.
D. a decrease in the quantity of resources employed in industry X.

D. a decrease in the quantity of resources employed in industry X.

An increase in consumer desire for strawberries is most likely to:
A. increase the number of strawberry pickers needed by farmers.
B. reduce the supply of strawberries.
C. reduce the number of people willing to pick strawberries.
D. reduce the need for strawberry pickers.

A. increase the number of strawberry pickers needed by farmers.

If competitive industry Y is incurring substantial losses, output will:

contract as resources move away from industry Y.

The economic function of profits and losses is to:

signal that resources should be reallocated.

In a competitive economy, prices:
A. influence consumers in their purchases of goods and services.
B. influence businesses in their purchases of economic resources.
C. influence workers in making occupational choices.
D. do all of these.

D. do all of these.

If a competitive industry is neither expanding nor contracting, we would expect:

economic profits to be zero.

Suppose industry A is realizing substantial economic profit. Which of the following best describes what will happen in this competitive market?
A. Firms will leave the industry and output will fall.
B. Firms will enter the industry and output will fall.
C. Firms will leave the industry and output will rise.
D. Firms will enter the industry and output will rise.

D. Firms will enter the industry and output will rise.

What does the competitive market system do?

encourages innovation because successful innovators are rewarded with economic profits.

The most efficient combination of resources in producing any output is the combination that:
A. comes closest to using the same quantities of land, labor, capital, and entrepreneurial ability.
B. can be obtained for the smallest money outlay.
C. uses the smallest total quantity of all resources.
D. conserves most on the use of labor.

B. can be obtained for the smallest money outlay.

39. Refer to the above data. In view of the indicated resource prices, the economically most efficient production technique(s) is (are) technique(s):
A. #1.
B. #2 and #4.
C. #3.
D. #1 and #3.

B. #2 and #4.

40. Refer to the above data. Assuming that the firm is motivated by self-interest and that the 20 units which can be produced with each technique can be sold for $2 per unit, the firm will:
A. realize an economic profit of $10.
B. realize an economic profit of $4.
C. not earn any economic profit.
D. close down rather than incur a loss by producing.

A. realize an economic profit of $10.

Refer to the above data. If a new production technique is developed that enables a firm to produce 20 units of output with 3 units of land, 3 of labor, 1 of capital, and 2 of entrepreneurial ability, this technique would:
A. not be adopted because, although it reduces production costs, it does not increase profit.
B. be adopted because it would lower production costs and increase economic profit.
C. not be adopted because it entails higher production costs than other available techniques.
D. be adopted, even though economic profits would be reduced slightly.

B. be adopted because it would lower production costs and increase economic profit.

Answer the next question(s) on the basis of 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 $2 and $3 respectively.

42. Refer to the above information. Which technique is economically most efficient in producing A?
A. I
B. II
C. III
D. IV

D. IV

Answer the next question(s) on the basis of 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 $2 and $3 respectively.

43. Refer to the above information. If the price of product A is $0.50, the firm will realize:
A. an economic profit of $4.
B. an economic profit of $2.
C. an economic profit of $6.
D. a loss of $3.

B. an economic profit of $2.

In a competitive market economy, firms will select the least-cost production technique because:

to do so will maximize the firms' profits.

The market system's answer to the fundamental question "What will be produced?" is essentially:

"Goods and services that are profitable."

The market system's answer to the fundamental question "How will the goods and services be produced?" is essentially:

"Using the least-cost production techniques."

The market system's answer to the fundamental question "Who will get the goods and services?" is essentially:

"Those willing and able to pay for them."

The market system's answer to the fundamental question "How will the system accommodate change?" is essentially:

"Through the guiding function of prices and the incentive function of profits."

The market system's answer to the fundamental question "How will the system promote progress?" is essentially:

"Through the profit potential that encourages development of new technology."

The advent of DVDs has virtually demolished the market for videocassettes. This is an example of:

creative destruction.

Consumer sovereignty refers to the idea that:

the idea that the decisions of producers must ultimately conform to consumer demands.

The dollar votes of consumers ultimately determine the composition of output and the allocation of resources in a market economy. This statement best describes the concept of:

consumer sovereignty.

Which of the following is not one of the five fundamental questions?
A. What prices will be charged for goods and services?
B. Who will get the goods and services?
C. What goods and services will be produced?
D. How will the system promote progress?

A. What prices will be charged for goods and services?

"Consumer sovereignty" means that:

buyers determine what will be produced based on their "dollar votes" for the goods and services offered by sellers.

Which of the following best describes the invisible-hand concept?
A. The desires of resource suppliers and producers to further their own self-interest will automatically further the public interest.
B. The nonsubstitutability of resources creates a conflict between private and public interests and calls for government intervention.
C. The market system is the best system for overcoming the scarce resources-unlimited wants problem.
D. Central direction by the government will improve resource allocation in a capitalistic economy.

A. The desires of resource suppliers and producers to further their own self-interest will automatically further the public interest.

The invisible hand refers to the:

notion that, under competition, decisions motivated by self-interest promote the social interest.

The invisible-hand concept suggests that:

assuming competition, private and public interests will coincide.

The invisible-hand concept suggests that:

when firms maximize their profits, society's output will also be maximized.

Two major virtues of the market system are that it:

allocates resources efficiently and allows economic freedom.

According to the concept of the "invisible hand," if Susie opens and operates a profitable childcare center, then:
A. government should regulate the business to ensure quality.
B. the profit Susie earns indicates that she is overcharging for her services.
C. she has served society's interests by providing a desired good or service.
D. this demonstrates that consumer sovereignty is not present in this market.

C. she has served society's interests by providing a desired good or service.

The invisible hand promotes society's interests because:

individuals pursuing their self-interest will try to produce goods and services that people in society want and are willing to purchase.

The coordination problem in the centrally planned economies refers to the idea that:

planners had to direct required inputs to each enterprise.

"Under central planning, some group has to decide how to get the necessary inputs produced in the right amounts and delivered to the right places at the right time. This is a nearly impossible task without markets and profits." This quotation best identifies the:

coordination problem under central planning.

"Because the outputs of many industries are the inputs to other industries, the failure of any single industry to fulfill the output quantities specified in the central plan caused a chain-reaction of adverse repercussions on production." This quotation best identifies the:

coordination problem under central planning.

Shortages and unmet demand provide opportunities for individuals and firms to profit under capitalism, but they present no such opportunities under central planning. This reality represents central planning's:

incentive problem.

Innovation lagged in the centrally planned economies because:

enterprises resisted innovation in fear that their production targets would be raised.

Enterprise managers and workers in the Soviet Union often resisted innovations in production methods because:

production targets were often increased when innovation occurred.

The failure of Soviet central planning was reflected in:
A. a declining growth rate.
B. poor quality goods.
C. the failure to provide promised consumer goods.
D. all of these.

D. all of these.

If products were in short or surplus supply in the Soviet Union:

producers would not react because no price or profit signals occurred.

The simple circular flow model shows that:

households are on the selling side of the resource market and on the buying side of the product market.

The two basic markets shown by the simple circular flow model are:

product and resource.

In the resource market:

households sell resources to businesses

Which of the following is a limitation of the simple circular flow model?

the determination of product and resource prices is not explained.

In the simple circular flow model:

businesses are sellers of final products.

In terms of the circular flow diagram, households make expenditures in the _____ market and receive income through the _____ market.
A. product; financial
B. resource; product
C. product; resource
D. capital; product

C. product; resource

In terms of the circular flow diagram, businesses obtain revenue through the _____ market and make expenditures in the _____ market.
A. product; financial
B. resource; product
C. product; resource
D. capital; product

C. product; resource

Households and businesses are:

sellers in the resource and product markets respectively.

In the circular flow model:

households sell resources to firms.

79. Refer to the above diagram. Arrows (1) and (2) represent:
A. goods and resources respectively.
B. money incomes and output respectively.
C. output and money incomes respectively.
D. resources and goods respectively.

D. resources and goods respectively.

80. Refer to the above diagram. Arrows (3) and (4) represent:
A. goods and services respectively.
B. incomes and consumer expenditures respectively.
C. resources and goods respectively.
D. consumer expenditures and income respectively.

B. incomes and consumer expenditures respectively.

81. Refer to the above diagram. Arrows (1) and (3) are associated with:
A. the money market.
B. the resource market.
C. the product market.
D. international trade.

B. the resource market.

Which of the following best illustrates the circular flow model in action?
A. Bobbie goes to work and builds cars, and uses the income she receives to buy food at the grocery store.
B. Evan buys a new couch; the owner of the furniture store uses some of the money from the sale to pay her supplier, and uses the rest to take her family out to dinner.
C. Boeing experiences a surge in orders for new airplanes, prompting the company to hire more workers.
D. All of the above.

D. All of the above.

(Consider This) In 1975 McDonald's introduced its Egg McMuffin breakfast sandwich, which remains popular and profitable today. This longevity illustrates the idea of:
A. opportunity cost.
B. upsloping supply.
C. consumer sovereignty.
D. specialization.

C. consumer sovereignty.

(Consider This) In 1996 McDonald's introduced its Arch Deluxe hamburger, which failed to catch on with the public and was subsequently dropped from the menu. This failure illustrates the idea of:
A. consumer sovereignty.
B. technological change.
C. downsloping demand.
D. specialization.

A. consumer sovereignty.

(Last Word) According to economist Donald Boudreaux, the world's tens of billions of individual resources get arranged productively:
A. because government has become highly effective at central planning.
B. because private property encourages people to consider the alternative uses of their resources and select those that provide the most rewards.
C. because people tend to be creative and orderly.
D. through random trial and error.

B. because private property encourages people to consider the alternative uses of their resources and select those that provide the most rewards.

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