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Ch 2 Review Questions

Which of the following is a distinguishing feature of a command system?
central planning
Which of the following is a distinguishing feature of laissez-faire capitalism?
Public ownership of all capital.
An economic system:
is a particular set of institutional arrangements and a coordinating mechanism used to respond to the economizing problem.
Which of the following is not a typical characteristic of a market system?
Government ownership of most property resources.
Broadly defined, competition involves:
independently acting buyers and sellers and freedom to enter or leave markets.
Competition means that:
there is more than one seller in a market.
The use of money contributes to economic efficiency because:
it promotes specialization by overcoming the problems with barter.
Which of the following is one of the Five Fundamental Questions?
What goods and services will be produced?
From society’s point of view, the economic function of profits and losses is to:
reallocate resources from less desired to more desired uses.
Economic profits and losses:
are essential to the reallocation of resources from less desired to more desired goods.
The competitive market system:
encourages innovation because successful innovators are rewarded with economic profits.
In a competitive market economy, firms select the least-cost production technique because:
to do so will maximize the firms’ profits.
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 promote progress?” is essentially:
“Through the profit potential that encourages development of new technology.”
“Consumer sovereignty” refers to the:
idea that the decisions of producers must ultimately conform to consumer demands.
Which of the following best describes the invisible-hand concept?
The desires of resource suppliers and producers to further their own self-interest will automatically further the public interest.
Two major virtues of the market system are that it:
allocates resources efficiently and allows economic freedom.
“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.
The incentive problem under communist central planning refers to the idea that:
workers, managers, and entrepreneurs could not personally gain by responding to shortages or surpluses or by introducing new and improved products.
Which of the following best illustrates the circular flow model in action?
Bobbie goes to work and builds cars, and uses the income she receives to buy food at the grocery store.
Which of the following statements is true about risk management in market systems versus command systems?
Market systems manage risk better because entrepreneurs taking risks bear the costs of poor decisions, where in command systems government decision makers don’t bear those costs.
In 2000, McDonald’s introduced its McSalad Shaker, which failed to catch on with the public and was subsequently dropped from the menu. This failure illustrates the idea of:
consumer sovereignty.
According to economist Donald Boudreaux, the world’s tens of billions of individual resources get arranged productively:
because private property encourages people to consider the alternative uses of their resources and select those that provide the most rewards.
Since World War II:
South Korea’s market economy has significantly outperformed North Korea’s command economy.

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