File: Chapter 03 Economic Institutions
True/False
[Question]
1. Private property rights are essential to market economies.
2. In a market economy, society relies on the self-interest of individuals to determine what, how,
and for whom to produce.
3. The goal of socialist economies is to distribute what is produced according to the needs of
individuals. Market economies tend to distribute what is produced according to ability and
inherited wealth.
4. Feudalism and mercantilism relied on markets to solve the three main coordination problems.
5. Households supply factors of production to business and are paid by business for doing so.
The market where this interaction takes place is called the factor market.
6. Businesses produce goods and services and sell them to households and governments. The
market where this interaction takes place is called the goods market.
7. Limited liability is a key advantage of partnerships and sole proprietorships over corporations.
8. Governments establish the laws that regulate the interaction between businesses and
households but do not serve as actors in the economy themselves.
9. The L3C type of corporation, sometimes called a benefit corporation, ignores profit
considerations and instead pursues only social goals.
10. When there are market externalities, the market allocation of resources will be optimal.
11. Membership in the Group of Five consists of both developed and developing countries.
12. Market economies are based upon:
A. private property and individual good will toward others.
B. government planning and individual good will toward others.
C. government planning and individual self-interest.
D. private property and individual planning.
13. Private property rights:
A. are essential elements of a market economy.
B. do not need to be enforced in market economies.
C. must be established before a socialist economy can function properly.
D. ensure an equitable distribution of income in market economies.
14. McDonald’s Corporation lost a battle to keep a Singapore firm, Future Enterprises, from
selling goods under the labels MacNoodles, MacTea, and MacChocolate. In this case, the court
system in Singapore was defining:
A. globalization.
B. limited liability.
C. consumer sovereignty.
D. property rights.
15. A market economy:
A. requires government to set prices.
B. allocates according to need.
C. distributes property rights.
D. relies on the invisible hand to coordinate supply and demand.
16. Which of the following is not a characteristic of pure capitalism?
A. Government ownership of capital
B. Private ownership of land
C. Freedom of enterprise
D. Worker freedom
17. Which of the following is a characteristic of a market economy?
A. Private property
B. Government ownership of the means of production
C. Distribution according to need
D. Tradition determines the what, how, and for whom decisions
18. For a market to exist:
A. private property rights must be allocated and defended by government.
B. government must guarantee equal treatment for all.
C. individuals must be concerned with the social good.
D. everyone must have identical wants and desires.
19. In a market economy:
A. government owns the means of production so that it can produce what is in society’s best
interest.
B. businesses design their plans to maximize their profit and the market is relied upon to see that
individual self-interest is consistent with society’s interest.
C. workers are directed by government planning boards to produce what is in society’s best
interest.
D. government sets prices to make necessities affordable because it is in society’s best interest to
make necessities affordable.
20. Markets coordinate economic activity through:
A. the price mechanism.
B. commanding individuals what to do.
C. asking individuals what to do.
D. the legal mechanism.
21. Suppose that at the current price consumers would like to purchase 10 million large-screen
televisions and 15 million are available. When the market coordinates the demand and supply for
large-screen televisions, the price of large-screen televisions will:
A. rise.
B. fall.
C. stay the same.
D. be fixed by the government.
22. Suppose that at the current price producers of CDs offer 5 million CDs for sale but
consumers want to buy 6 million. When the market coordinates the demand and supply for CDs,
the price of CDs will:
A. rise.
B. fall.
C. stay the same.
D. be fixed by the government.
23. Capitalism:
A. is based on private property and the market.
B. does not have a rationing mechanism.
C. gives private property rights to government.
D. relies on market forces to establish initial property rights.
24. A socialist economy in theory:
A. requires private ownership of property.
B. is coordinated by the invisible hand.
C. expects people to be altruistic.
D. expects people to be selfish.
25. In the former USSR, state planners decided what was to be produced. They passed orders
down to factories, allocating raw materials, workers, and other factors of production to them.
This is an example of (a):
A. corporation.
B. command economy.
C. market economy.
D. government as a referee.
26. Through most of the 20th century in the former USSR:
A. people contributed what they could and took what they needed without a market.
B. the country was free of economic forces.
C. a type of socialism that departed from theory was implemented.
D. goods were distributed according to their need.
27. In socialism:
A. economic forces do not operate.
B. individuals are encouraged to act for their own benefit.
C. government planning, rather than the market, is relied upon to coordinate economic activity.
D. distribution is determined by the individual’s ability.
28. Socialism in theory is based on the principle that individuals should:
A. look out for their own interests and let the government look out for the public interest.
B. rely on the government to meet their needs.
C. cooperate with one another to meet their needs.
D. compete with one another to meet their needs.
29. In principle, socialism is:
A. less concerned about fairness than capitalism.
B. just as concerned about fairness as capitalism.
C. more concerned about fairness than capitalism.
D. not concerned about fairness at all.
30. In practice, distribution under socialism is primarily determined by:
A. individual altruism and cooperation.
B. the ability of each individual to produce.
C. central planners within the government.
D. market forces of supply and demand.
31. In a socialist economic system:
A. markets are relied upon to decide what to produce, but government intervenes when
necessary.
B. individuals tell government what to produce and the government decides how best to achieve
that goal.
C. government planning boards decide what to produce, but rely on markets to achieve that goal.
D. government planning boards decide what to produce and then give individuals directives how
to achieve those goals.
32. Market and socialist economies can be contrasted in all the following ways except that:
A. under a market economy labor is allocated by individual choice based on wage levels; under
traditional socialism it is allocated by a government planning board.
B. under a market economy government plays no role in the market; under socialism,
government planning boards make most major economic decisions.
C. under a market economy the distribution of income is to each according to his ability, effort,
and inheritance; under ideal socialism the distribution of income is to each according to his need.
D. under a market economy self-interest is the primary motive of economic activity; under
socialism, individuals are supposed to act from considerations of the general good.
33. Which of the following is not one of the three principal components of a socialist economy?
A. Government ownership of the means of production
B. Workers directed by a government planning board as to where they will work and how much
they will be paid
C. Entrepreneurs are encouraged by the profit motive, rather than government directive, to
satisfy consumer wants in the most efficient manner possible
D. Distribution is according to need
34. Most economies today are:
A. pure market economies.
B. differentiated primarily by the degree to which they depend on markets.
C. differentiated primarily by who owns the means of production.
D. socialist.
35. The Industrial Revolution was important to the history of economic systems because it:
A. changed the way people exchanged goods—from barter to using money as a medium of
exchange.
B. concentrated wealth in the hands of a few noblemen who then controlled the land in their
region, creating a feudal system.
C. increased the wealth of merchants and artisans and eventually led to a change in economic
systems to mercantilism.
D. increased the power of capitalists and eventually led to a revolution instituting capitalism as
the dominant economic system.
36. During the Industrial Revolution:
A. feudal lords lost their power to artisans.
B. mercantilists lost their power to capitalists.
C. artisans lost their power to mercantilists.
D. capitalists lost their power to mercantilists.
37. In the mercantilist system:
A. markets rather than political forces make the central economic decisions.
B. serfs make the central economic decisions.
C. governments let the market decide what to produce.
D. governments distributed the rights to produce.
38. In a feudalist society, in comparison with mercantilism:
A. merchants play a more important political role than serfs.
B. tradition plays a more important role than the government.
C. government plays a large role in determining the what, how, and for whom decisions.
D. markets make the central economic decisions.
39. In contrast to the capitalism of the early Industrial Revolution, both feudalism and
mercantilism:
A. had stronger central government intervention in economic life.
B. expected tradition to answer the central coordination problems.
C. relied less on the invisible hand to coordinate economic decisions.
D. relied less on state intervention to promote economic growth.
40. Capitalism and socialism have not existed forever. Capitalism came into existence in the:
A. mid-1800s and socialism came into existence in the early 1900s.
B. early 1900s and socialism came into existence in the mid-1800s.
C. mid-1700s and socialism came into existence in the early 1900s.
D. early 1900s and socialism came into existence in the mid-1700s.
41. Which two systems require the least amount of government intervention?
A. Mercantilism and capitalism
B. Feudalism and socialism
C. Capitalism and feudalism
D. Mercantilism and socialism
42. In the factor market:
A. households supply factors of production to business and are paid by business for doing so.
B. households supply factors of production to business and are paid by government for doing so.
C. business produces goods and services and sells them to households and government.
D. government produces goods and services and supplies them to households and business.
43. In the goods market:
A. households supply factors of production to businesses and are paid by businesses for doing
so.
B. households supply goods to businesses and are paid by businesses for doing so.
C. businesses produce goods and services and sells them to households and government.
D. government produces goods and services and supplies them to households and businesses.
44. The market where businesses sell goods and services to households and the government is
called the:
A. goods market.
B. factor market.
C. capital market.
D. money market.
45. Households are on the:
A. supply side of factor markets and the demand side of goods markets.
B. demand side of factor markets and the supply side of goods markets.
C. supply side of both factor markets and goods markets.
D. demand side of both factor markets and goods markets.
46. Businesses are on the:
A. supply side of factor markets and the demand side of goods markets.
B. demand side of factor markets and the supply side of goods markets.
C. supply side of both factor markets and goods markets.
D. demand side of both factor markets and goods markets.
47. Government is on the:
A. supply side of factor markets and the demand side of goods markets.
B. demand side of factor markets and the supply side of goods markets.
C. supply side of both factor markets and goods markets.
D. demand side of both factor markets and goods markets.
48. Governments do all of the following except:
A. oversee the interaction of households and businesses in the goods and factor markets.
B. demand labor services from households in the factor market.
C. demand goods and services from businesses in the goods market.
D. supply labor services to businesses in the factor market.
49. Businesses do all of the following except:
A. pay taxes to the government.
B. demand labor services from households in the factor market.
C. demand goods and services from households in the goods market.
D. supply goods and services to the government in the goods market.
50. Households do all of the following except:
A. receive income that is redistributed by the government.
B. demand labor services from businesses in the factor market.
C. demand goods and services from businesses in the goods market.
D. supply labor services to the government in the factor market.
51. Entrepreneurship is defined as the ability to:
A. organize and get something done.
B. raise investment capital.
C. earn above-average profits.
D. minimize production costs.
52. Businesses fail because:
A. they follow the principle of consumer sovereignty too closely.
B. the invisible hand determines that they are not producing something that is socially valuable.
C. they earn excessive profits.
D. entrepreneurship is present.
53. Profit is:
A. the same as cost.
B. the same as revenue.
C. what is left over from total revenue after all of the appropriate costs have been subtracted.
D. what is left over from total cost after all of the appropriate revenues have been subtracted.
54. A firm’s profits equal $100 if
A. its total revenue is $100.
B. the sum of its total revenue and its total cost is $100.
C. the difference between its total revenue and its total cost is $100.
D. its total cost is $100.
55. If a firm’s total revenue is $10,000 and its total costs are $9,000, then its profits are:
A. -$1,000.
B. $1,000.
C. $10,000.
D. $19,000.
56. Business decisions about what and how much to produce are based on what:
A. maximizes market share.
B. consumers demand.
C. the government wants.
D. maximizes profits.
57. Relative to corporations, sole proprietorships are:
A. more numerous and smaller in size.
B. less numerous and smaller in size.
C. more numerous and larger in size.
D. less numerous and larger in size.
58. A company such as Microsoft or Pepsi Co. is a legal hassle to organize, difficult to monitor,
and possibly could double tax income. It is an example of a:
A. consumer.
B. sole proprietorship.
C. partnership.
D. corporation.
59. With a sole proprietorship:
A. all of one’s assets are at risk of loss.
B. shares are valued by the marketplace.
C. responsibility is shared.
D. income is taxed twice
60. A defining difference in what makes a firm a sole proprietorship, partnerships, or a
corporation is the:
A. size of each type of business.
B. number of each type of business.
C. nature of ownership and accountability for each type of business.
D. profitability of each type of business.
61. A partnership is a business:
A. with two or more owners, with each owner liable for every other owner’s actions.
B. that has only one owner.
C. legally treated as a person and owned by stockholders who are not liable for the actions of the
corporate “person.”
D. in which each owner is liable only to the extent of his or her own investment.
62. A business is most likely to be characterized as a corporation if:
A. it has two or more owners, with each owner liable for every other owner’s actions.
B. it has only one owner.