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47.
According to Adam Smith, the success of decentralized market economies is primarily due to
a.
the basic benevolence of society.
b.
society's legal system.
c.
individuals' pursuit of self-interest.
d.
partnerships that are forged between business and government.
48.
The self-interest of the participants in an economy is guided into promoting general economic self-
interest by
a.
the invisible hand.
b.
market power.
c.
government intervention.
d.
oikonomos.
49.
In an economy in which decisions are guided by prices and individual self-interest, there is
a.
the potential to achieve efficiency in production.
b.
a strong need for government intervention in the market.
c.
less efficiency than would be observed in a centrally-planned economy.
d.
more need for a strong legal system to control individual greed than would be needed in a
centrally-planned
economy.
50.
In a market economy, who makes the decisions that guide most economic activity?
a.
firms only
b.
households only
c.
firms and households
d.
government
51.
In a market economy, economic activity is guided by
a.
the government.
b.
corporations.
c.
central planners.
d.
self-interest and prices.
52.
In a market economy,
a.
households decide which firms to work for and what to buy with their incomes.
b.
firms decide whom to hire and what to make.
c.
a central planner makes decisions about production and consumption.
d.
Both a and b are correct.
53.
Which of the following statements does not apply to a market economy?
a.
Firms decide whom to hire and what to produce.
b.
The “invisible hand” usually maximizes the well-being of society as a whole.
c.
Households decide which firms to work for and what to buy with their incomes.
d.
Government policies are the primary forces that guide the decisions of firms and households.
54.
In a market economy, economic activity is guided by
a.
the government.
b.
central planners.
c.
large businesses.
d.
prices and self-interest.
55.
Which of the following statements about market economies is correct?
a.
In a market economy, no one is looking out for the economic well-being of society as a whole.
b.
Market economies are characterized by decentralized decision making and self-interested
decision makers.
c.
Market economies have proven remarkably successful in promoting overall economic well-
being.
d.
All of the above are correct.
56.
The decisions of firms and households are guided by prices and self-interest in a
a.
command economy.
b.
centrally-planned economy.
c.
market economy.
d.
All of the above are correct.
57.
For markets to work well, there must be
a.
market power.
b.
a central planner.
c.
property rights.
d.
abundant, not scarce, resources.
58.
Prices usually reflect
a.
only the value of a good to society.
b.
only the cost to society of making a good.
c.
both the value of a good to society and the cost to society of making the good.
d.
neither the value of a good to society nor the cost to society of making the good.
59.
Prices direct economic activity in a market economy by
a.
influencing the actions of buyers and sellers.
b.
reducing scarcity of the goods and services produced.
c.
eliminating the need for government intervention.
d.
allocating goods and services in the most equitable way.
60.
A friend of yours asks you why market prices are better than government-determined prices.
Because you
understand economic principles, you say that market-determined prices are better
because they generally reflect
a.
the value of a good to society, but not the cost of making it.
b.
the cost of making a good to society, but not its value.
c.
both the value of a good to society and the cost of making it.
d.
neither the value of a good to society nor the cost of making it.
61.
If the government were to intervene in a market economy and fix the price of visiting a health
care provider below
the market price, then we would expect, relative to the market outcome,
a.
an increase in the number of visits people want to make and an increase in the number of visits
health care
providers want to provide.
b.
an increase in the number of visits people want to make and a decrease in the number of visits
health care
providers want to provide.
c.
a decrease in the number of visits people want to make and an increase in the number of visits
health care
providers want to provide.
d.
a decrease in the number of visits people want to make and a decrease in the number of visits
health care
providers want to provide.
62.
If the government were to intervene and set the rent for apartments in New York City below the
market rent, then
we would expect, relative to the market outcome,
a.
an increase in the number of people wanting to live in apartments in New York City.
b.
a decrease in the number of people wanting to live in apartments in New York City.
c.
an increase in the number of apartments available for rent in New York City.
d.
None of the above is correct.
63.
If the government were to intervene and set the price of a dozen eggs above the market price,
then we would
expect, relative to the market outcome,
a.
an increase in the number of eggs people want to buy and an increase in the number of eggs
farmers want to
sell.
b.
an increase in the number of eggs people want to buy and a decrease in the number of eggs
farmers want to
sell.
c.
a decrease in the number of eggs people want to buy and an increase in the number of eggs
farmers want to
sell.
d.
a decrease in the number of eggs people want to buy and a decrease in the number of eggs
farmers want to
sell.
64.
If the government were to intervene and set a wage for unskilled labor above the market wage,
then we would
expect, relative to the market outcome,
a.
an increase in the number of unskilled jobs available.
b.
a decrease in the number of unskilled jobs available.
c.
a decrease in the number of workers wanting unskilled jobs.
d.
None of the above is correct.
65.
When the government prevents prices from adjusting naturally to supply and demand,
a.
it equates the amount buyers want to buy with the amount sellers want to sell.
b.
it adversely affects the allocation of resources.
c.
it improves equality and efficiency.
d.
it improves efficiency but reduces equality.
66.
One reason we need government, even in a market economy, is that
a.
there is insufficient market power in the absence of government.
b.
property rights are too strong in the absence of government.
c.
the invisible hand is not perfect.
d.
Both a and b are correct.
67.
The ability of an individual to own and exercise control over scarce resources is called
a.
market failure.
b.
property rights.
c.
externality.
d.
market power.
68.
The government enforces property rights by
a.
requiring property owners to pay property taxes.
b.
providing police and courts.
c.
forcing people to own property.
d.
providing public parks and recreation facilities.
69.
A company that formerly produced music CDs went out of business because too many potential
customers bought
illegally-produced copies of the CDs instead of buying the product directly from
the company. This instance serves
as an example of
a.
market power.
b.
inefficient trade.
c.
inadequate enforcement of property rights.
d.
the invisible hand at work.
70.
For which of the following problems can well-designed public policy enhance economic efficiency?
a.
both externalities and market power
b.
externalities, but not market power
c.
market power, but not externalities
d.
neither externalities nor market power
71.
Public policies
a.
may be able to improve either economic efficiency or equality.
b.
may be able to improve economic efficiency but cannot improve equality.
c.
may be able to improve equality but cannot improve economic efficiency.
d.
cannot improve either equality or economic efficiency.
72.
To say that government intervenes in the economy to promote efficiency is to say that
government is attempting to
a.
create a more fair distribution of income.
b.
change the way in which the economic pie is divided.
c.
enlarge the economic pie.
d.
All of the above are correct.
73.
To say that government intervenes in the economy to promote equality is to say that government
is aiming to
a.
create a more fair distribution of income.
b.
change the ingredients that are used to “bake” the economic pie.
c.
enlarge the economic pie.
d.
All of the above are correct.
74.
Which of the following could reduce economic efficiency?
a.
laws that encourage lawsuits
b.
policies that redistribute income
c.
policies that impose significant restrictions on international trade
d.
All of the above are correct
75.
The term used to describe a situation in which markets do not allocate resources efficiently is
a.
economic meltdown.
b.
market failure.
c.
equilibrium.
d.
the effect of the invisible hand.
76.
A rationale for government involvement in a market economy is
a.
markets sometimes fail to produce a fair distribution of economic well-being.
b.
markets sometimes fail to produce an efficient allocation of resources.
c.
property rights have to be enforced.
d.
All of the above are correct.
77.
The term market failure refers to
a.
a situation in which the market on its own fails to allocate resources efficiently.
b.
an unsuccessful advertising campaign which reduces demand for a product.
c.
a situation in which competition among firms becomes ruthless.
d.
a firm which is forced out of business because of losses.
78.
Which of the following is not generally regarded by economists as a legitimate reason for the
government to
intervene in a market?
a.
to promote efficiency
b.
to promote equality
c.
to enforce property rights
d.
to protect an industry from foreign competition
79.
Which of the following can lead to market failure?
a.
externalities and market power
b.
externalities but not market power
c.
market power but not externalities
d.
neither externalities nor market power
80.
Causes of market failure include
a.
externalities and market power.
b.
market power and incorrect forecasts of consumer demand.
c.
externalities and foreign competition.
d.
incorrect forecasts of consumer demand and foreign competition.
81.
Market failure can be caused by
a.
low consumer demand.
b.
equilibrium prices.
c.
externalities and market power.
d.
high prices and foreign competition.
82.
Thousands of people develop lung cancer from second-hand exposure to cigarette smoke. This is
an example of
a.
a market failure caused by an externality.
b.
a market failure caused by market power.
c.
a market failure caused by equality.
d.
There is no market failure in this case.
83.
A species of snakes became extinct due to pollution in a river where the snakes once lived. This
is an example of
a.
a market failure caused by an externality.
b.
a market failure caused by market power.
c.
a market failure caused by equality.
d.
There is no market failure in this case.
84.
The term "market failure"
a.
means the same thing as "market power."
b.
refers to the dissolution of a market when firms decide to quit producing a certain product.
c.
refers to the failure of a market to produce an efficient allocation of resources.
d.
refers to government's failure to enforce the property rights of households or firms that
participate in a
certain market.
85.
If an externality is present in a market, economic efficiency may be enhanced by
a.
government intervention.
b.
a decrease in foreign competition.
c.
fewer market participants.
d.
weaker property rights.
86.
An example of an externality is the impact of
a.
bad weather on the income of farmers.
b.
the personal income tax on a person's ability to purchase goods and services.
c.
pollution from a factory on the health of people in the vicinity of the factory.
d.
increases in health care costs on the health of individuals in society.
87.
Which of the following is an example of an externality?
a.
Annie purchases a new dress.
b.
Antonio’s dog barks loudly during the night, waking his neighbors.
c.
Harold sells a book to Cathy, who reads the book and then gives it to James as a gift.
d.
Gloria watches a scary movie.
