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186. The degree to which an economic system approaches a market economy depends on the degree to which
a.
economic choices are made through the free interaction of buyers and sellers in the marketplace.
b.
there are monopolies in the marketplace.
c.
people have a high standard of living.
d.
advanced technology is used.
187. When all prices are set equal to marginal costs,
a.
consumers buy more than they should.
b.
consumers will get less utility.
c.
markets are giving correct signals to consumers.
d.
producers make excessive profits.
188. An efficient solution to a pricing problem
a.
makes both buyers and sellers better off than any other possible solution.
b.
may not be the socially "fair" solution.
c.
occurs when producers' total cost of production equals consumers' total utility from the output produced.
d.
maximizes the output of the good being priced.
189. Which of the following functions is not performed by prices in a free market?
a.
guiding the allocation of resources
b.
conveying information about the marginal cost of production
c.
making the distribution of income more equitable
d.
replacing the need for governmental supervision of production
190. Many persons object to the results of the competitive market system because
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.
191. The issue of fairness versus efficiency arises
a.
only in a command economy.
b.
only in a market economy.
c.
in neither a command nor a market economy.
d.
in both a command and a market economy.
192. In a free-market economy, the pricing mechanism always operates to
a.
produce an equitable distribution of income.
b.
provide an efficient allocation of resources.
c.
correct any inequality in distribution of output.
d.
equate consumers' desires with ability to pay.
193. To equalize traffic on transportation routes, a pricing arrangement called "peak, off-peak pricing" would most likely
be proposed by
a.
economists.
b.
politicians.
c.
regulators.
d.
the general public.
194. Economics can decide
a.
the appropriate trade-off between fairness and efficiency.
b.
which pricing arrangements are fair and which are unfair.
c.
whether a pricing decision will impose heavy inefficiency costs on society.
d.
All of the above are correct.
195. If MU = MC = P, an economist can judge with certainty that the distribution of output is
a.
fair.
b.
equal.
c.
unbiased.
d.
efficient.
196. Marxists and leaders of communist economies actually often admire the market mechanism for its
a.
efficiency in allocation of resources.
b.
fairness in distribution of output.
c.
maximization of net benefits for consumers.
d.
effectiveness in achieving high rates of growth.
197. Free market economies have led to
a.
high growth rates but low efficiency.
b.
high efficiency and low growth rates.
c.
high growth rates and high efficiency.
d.
low growth rates and low efficiency.
198. To efficiently manage traffic on a system of bridges,
a.
the more-crowded bridges should have lower tolls, so that they are affordable.
b.
the tolls should be equal for all bridges, so that people can choose the most convenient routes.
c.
tolls should be higher on more-crowded bridges and lower on less-crowded bridges.
d.
there should be no tolls on bridges, because people should not have to pay to drive to their jobs.
199. The laissez-faire free-market system is
a.
an ideal of perfection.
b.
one that leaves no room for improvement.
c.
unmatched by any other system for allocative efficiency.
d.
All of the above are correct.
200. Higher prices may serve the public interest when:
a.
there is a shortage of goods or services available
b.
there is an uneven distribution of traffic on alternate routes
c.
higher prices never serve the public interest
d.
both a and b
201. Perfect central planning is nearly impossible for all of these reasons except:
a.
production processes between industries are often interdependent.
b.
some processes must be decided together, and not individually, because of their interdependence.
c.
if the output target for one industry is adjusted, many others must also be adjusted.
d.
all of these reasons are correct.
202. Define the following terms and explain why they are important in the study of economics.
a.
efficient allocation
b.
laissez faire
c.
peak pricing
d.
input-output analysis
e.
coordination tasks
203. An economy consists of two goods: beef and lamb. Of all the points on this economy's production possibilities
frontier, which one is best in terms of efficiency?
204. Explain why movie theaters charge more for evening performances than for matinees.
205. 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.
206. Assuming one can derive a correct input-output table, are there still any reasons to prefer the market to central
planning?
207. How does a free-market system address the output selection task?
208. How does the task of production planning happen in a laissez-faire economy?
209. How does a laissez-faire economy decide which consumer gets each of the goods that has been produced?
210. What makes production-planning a daunting task for central planners?
211. 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.
212. What is the rule for efficient output selection and how does the competitive market achieve it?
213. Milk costs $2 and the last unit provides $4 in marginal utility. Cheese costs $4 and the last unit provides $2 in
marginal utility. Is this an efficient allocation of resources? If so, why? If not, why not?
214. Jupiter likes moons more than rings and gets marginal utility worth $5 from the last moon, and $2 from the last ring.
Saturn prefers rings, getting MU = $3 from the last ring and $1 from moons. Describe a trade that would increase
efficiency.
215. The rule for efficient output selection is stated as MC = MU. Explain how the rule results in economic efficiency.
Figure 14-3
216. In Figure 14-3, if person 1 and person 2 have the indicated quantities of cheese and crackers, and are on the indicated
indifference curves, is there the possibility of mutually beneficial trade? Explain.
Figure 14-4
217. In Figure 14-4, if the cheese industry and the cracker industry have the indicated quantities of capital and labor and
are on the indicated production indifference curves, is there the possibility of mutually beneficial trade in inputs? Explain.
Figure 14-5
218. Figure 14-5 contains a production possibilities frontier for wheat and milk production. Explain why Point C is not a
point where resources are being used efficiently.
219. In an effort to prepare for war, the Defense Department is required by Congress to stockpile helium, once used to
provide lift for blimps (phased out in the 1960s). About 100 years of total U.S. usage of helium is in storage. The
Pentagon agrees to buy helium from producers at a price above what would otherwise prevail in the marketplace. Is this
likely to result in efficiency? Explain.
220. Some years ago New York City imposed rent controls in an effort to provide housing at "fair" prices for as many
people as possible. The result was a serious shortage of housing and deterioration of existing rental properties. How would
an economist have described the result in terms of economic efficiency?
221. Is a benevolent command economy likely to achieve greater efficiency than a purely competitive market system?
Explain.
222. Differentiate between consumer's surplus and producer's surplus. For a rational consumer, consumer's surplus will
never be a negative number. Why?
223. Is peak pricing economically efficient? Explain. Give an example to illustrate your answer.
224. Is an efficient market allocation fair? Explain.
225. Explain how the free-market mechanism adjusts prices so that resource allocation is economically efficient.
