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econ ch 2

1. Economic systems differ from one another based on who own the factors of production and:
A. How much resources are available in the economy and where they are located
B. Who make decisions regarding what to produce and how it is produced
C. What kinds of products are produced in the economy and how plentiful they are
D. How big the population is, and the makeup of the population
B. Who make decisions regarding what to produce and how it is produced
2. The market system is an economic system that:
A. Produces more consumer goods than capital goods
B. Produces more capital goods than consumer goods
C. Gives private individuals the right to own resources used in production
D. Emphasizes the government’s power to control markets and direct economic activity
C. Gives private individuals the right to own resources used in production
3. The market system is also known as:
A. Capitalism
B. Socialism
C. Central planning
D. Production system
A. Capitalism
4. Laissez-faire capitalism limits the government’s economic functions to the following, except:
A. Protecting private property rights
B. Establishing a legal environment to enforce contracts among individuals
C. Preventing individuals and firms from coercing others
D. Setting prices of individual goods and services
D. Setting prices of individual goods and services
5. One major element of the command system is:
A. An emphasis on private ownership of resources
B. Individual decentralized decision-making
C. Reliance on supply-and-demand forces to guide economic activity
D. Central planning conducted by the government
D. Central planning conducted by the government
6. The government may impose industrial safety regulations and occupational licensing requirements in which of the following economic systems?
A. Laissez-faire economy
B. Pure capitalism
C. Mixed market economy
D. Macroeconomic system
C. Mixed market economy
7. In a command system:
A. Self-interest motivates and commands each business firm’s decisions and actions
B. The head of each family decides what to do with the family’s resources
C. The government makes production and allocation decisions
D. Market traders command what outputs are produced and how they are allocated
C. The government makes production and allocation decisions
8. Which of the following would not be emphasized in a capitalist economy?
A. Private ownership of capital and other resources
B. Competition and decentralized decisions
C. Reliance on market forces to coordinate economic activity
D. Prevention of owners of capital from exposing this resource to risk
D. Prevention of owners of capital from exposing this resource to risk
9. The government may not implement policies intended to redistribute income in which of the following economic systems?
A. Laissez-faire capitalism
B. Command system
C. Mixed economy
D. Market system
A. Laissez-faire capitalism
10. The economies of North Korea and Cuba are:
A. Similar in that they are both basically command systems
B. Similar in that they are both basically market systems
C. Different in that North Korea has a command system while Cuba has a market system
D. Different in that Cuba has a command system while North Korea has a market system
A. Similar in that they are both basically command systems
11. Laissez-faire capitalism is characterized by:
A. Very limited government role in the economy
B. Active government intervention in the economy
C. Individuals and firms abiding by a government economic plan
D. A very fair distribution of income and wealth
A. Very limited government role in the economy
12. By freedom of enterprise, we mean that individual:
A. Workers are free to look for jobs and work in whichever firm will hire them
B. Firms are free to employ resources, to produce their output, and to sell their products
C. Producers are free to produce whatever the government decides are needed by the society
D. Consumers are free to buy whatever products will satisfy their needs the most
B. Firms are free to employ resources, to produce their output, and to sell their products
13. Capitalism gets its name from the fact that capital resources are mostly:
A. Owned by the state or government
B. Given the highest priority in the economy’s income distribution
C. Treated as private property
D. In the form of money and financial resources
C. Treated as private property
14. Which of the following statements is correct?
A. The operation of a market system eventually results in an equal distribution of income
B. Producers are “sovereign” in a market economy because they determine what is produced
C. The market system is efficient at allocating resources, but not at allocating products
D. Freedom of choice and enterprise are essential elements of the market system
D. Freedom of choice and enterprise are essential elements of the market system
15. In a market system, self-interest is the motivating force that:
A. Makes individuals unwilling to deliver anything of value to others
B. Makes owners of resources always want to use their resources themselves
C. Leads the economy to chaos and confusion, especially the larger economies
D. Coordinates and creates consistency in the operations of various parts of the economy
D. Coordinates and creates consistency in the operations of various parts of the economy
16. Consumers express self-interest when they:
A. Seek the lowest price for a product
B. Reduce business losses
C. Collect economic profits
D. Exclude others in their thinking
A. Seek the lowest price for a product
17. Private ownership and property rights in a market system have the following implications, except:
A. Individuals are free to take on the financial risks involved in a business
B. Trades that take place in the economy are mutually-agreeable transactions among individuals
C. Economic agents are allowed to act in their own self-interest
D. Large firms are allowed to coerce other firms and individuals
B. Trades that take place in the economy are mutually-agreeable transactions among individuals
18. Competition is more likely to exist when:
A. There is easy entry into and exit out of industries
B. A government-issued license is required to set up a firm in an industry
C. The government purchases most goods and services
D. Economic power is concentrated among a few large firms
A. There is easy entry into and exit out of industries
19. Competition in a market system denotes a condition where:
A. The diffusion of economic power limits its potential abuse
B. Any given product can be purchased at a wide range of prices
C. Contractual agreements among individual firms are restricted and avoided
D. A few large sellers are constantly jostling for market share
A. The diffusion of economic power limits its potential abuse
20. Which of the following statements about markets and prices is correct?
A. In a market system, buyers and sellers must be in face-to-face contact with each other
B. Prices affect the distribution of goods in a market system but not the allocation of resources
C. In a market system, prices serve to ration goods and services to consumers
D. The operation of a market system has little, if any, effect on the distribution of income in the economy
21. In a capitalist system, the decisions and actions of millions of consumers and firms are highly coordinated by:
A. The state and government
B. Markets and prices
C. A central planning agency
D. An international organization
C. A central planning agency
22. All of the following statements describe a market economy except:
A. Government prescribes the market prices for goods and services
B. Prices provide important signals to buyers and sellers
C. The allocation of resources is determined by their prices
D. The actions of buyers and sellers establish a product’s price
market economy except:
A. Government prescribes the market prices for goods and services
23. A characteristic of the market system is:
A. Extensive use of direct methods of production
B. A focus on labor, as opposed to capital resources
C. Reliance on the use of capital goods to expand total output
D. Avoidance of producing goods that do not satisfy consumer wants directly
C. Reliance on the use of capital goods to expand total output
24. A production system where various workers concentrate on different specialized tasks to contribute towards a whole product is referred to as:
A. A coincidence of wants
B. Roundabout production
C. Freedom of enterprise
D. Division of labor
D. Division of labor
25. Specialization is beneficial:
A. At the individual firm level, but not at the national and international levels
B. At the individual, regional, and even international levels
C. Only if there are differences in the abilities of resources
D. Only as long as money and capital goods are employed
B. At the individual, regional, and even international levels
26. Which is an example of barter?
A. A person trades a desk for a box of tools
B. A person buys clothes at a used clothing store
C. A gift of tuition money from parents to their children
D. The purchase of stock on the New York Stock Exchange
A. A person trades a desk for a box of tools
27. Which of the following is necessary to make a trade in a barter economy?
A. Money
B. Unlimited wants
C. A medium of exchange
D. A coincidence of wants
C. A medium of exchange
28. International specialization and trade:
A. Has to be done on a barter system
B. Often requires the exchange of currencies
C. Does not illustrate the division of labor
D. Requires active government regulation
B. Often requires the exchange of currencies
29. Which of the following is assumed to be most limited in scope under a market system?
A. Entrepreneurship
B. Self-interest
C. Competition
D. Government
D. Government
30. Which is one of the five fundamental questions that need to be dealt with in any economic system?
A. What makes the rate of unemployment low?
B. Who will be the richest group in the economy?
C. How will goods and services be produced?
D. How high should the prices of goods and services be?
C. How will goods and services be produced?
31. Which of the following is not one of the five fundamental questions that an economy must deal with?
A. How will the goods and services be produced?
B. Why should the goods and services be produced?
C. Who is to receive the goods and services produced in the economy?
D. In what ways will progress be promoted?
B. Why should the goods and services be produced?
32. Consumer sovereignty and “dollar votes” guide the market system in dealing with which fundamental economic question?
A. Which output will be produced?
B. How is the output to be produced?
C. How can the system accommodate change?
D. Who is to receive the output?
A. Which output will be produced?
33. The term consumer sovereignty means that:
A. Government is responsible for protecting consumers’ interests
B. What is produced is ultimately determined by what consumers buy
C. There are no limits on what consumers may buy in a market system
D. Producers have strong control over what consumers buy
B. What is produced is ultimately determined by what consumers buy
34. The term dollar votes in a market system means:
A. Inflation will occur if consumers don’t spend wisely
B. Voters may be offered dollars to help elect certain political candidates
C. Government is responsible for determining what will be considered legal tender
D. Consumers “vote” for certain products to be produced by how they spend their incomes
D. Consumers “vote” for certain products to be produced by how they spend their incomes
35. Payments that a firm makes to obtain needed resources comprise its:
A. Costs
B. Profits
C. Capital
D. Revenues
A. Costs
36. In a market system, which of the following will eliminate high-cost producers, and allow only the low-cost producers to survive?
A. Competition
B. Money
C. A sovereign government
D. Specialization
A. Competition
37. The production technique that is most efficient is the one that produces a given amount of output:
A. using the least amount of labor resources
B. at the highest price per unit
C. at the lowest cost per unit
D. that yields the highest revenues
C. at the lowest cost per unit
38. McDonald’s introduced the “Big Mac” in 1968 and it turned out to be a hit, but the “Arch Deluxe” introduced in 1996 was not. The success or failure of a product in the market system is determined by:
A. Capitalism and entrepreneurship
B. Specialization and exchange
C. Consumer sovereignty and dollar votes
D. Capital goods and roundabout production
C. Consumer sovereignty and dollar votes
39. Economic efficiency is the primary guide in answering which of the fundamental questions in a market economy?
A. What will be produced?
B. How is the output to be produced?
C. How can the system accommodate change?
D. Who is to receive the output?
B. How is the output to be produced?
40. In a market system, the distribution of goods and services among consumers is largely determined by:
A. The willingness and ability of consumers to pay the prices
B. Whoever needs the goods and services the most
C. Whoever has the closest connection to firms and the government
D. A random factor that is almost impossible to predict
A. The willingness and ability of consumers to pay the prices
The distribution of income in a market system is a primary factor that resolves which of the following fundamental economic questions?
A. What will be produced?
B. How will the output to be produced?
C. How will the system accommodate change?
D. Who will get the output?
D. Who will get the output?
In a market economy, the incomes of consumers depend primarily upon:
A. Government policies in setting wages and interest rates
B. The quantity and prices of resources that they possess
C. The amount of savings that they have accumulated
D. How closely connected they are to government and business leaders
If economic profits in a particular industry increase, then we would expect:
A. Resources to be diverted away from that industry
B. Firms in that industry to produce less output
C. Firms to enter that industry thus expanding it
D. Consumers to buy less from that industry
C. Firms to enter that industry thus expanding it
In a market system, resources will move away from an industry when:
A. Profits of firms in the industry are rising
B. Demand for the industry’s product is decreasing
C. The production of output in the industry is rising
D. Profits of firms in other industries are falling
B. Demand for the industry’s product is decreasing
“Creative destruction” in a market system is brought about by:
A. Entrepreneurship
B. Striking workers
C. Regulation by the government
D. Money-based trade
A. Entrepreneurship
An increase in the demand for a product and a reduction in its costs of production would:
A. Decrease the profits of producers
B. Encourage firms to leave an industry
C. Encourage firms to enter an industry
D. Cause a shortage of the product
C. Encourage firms to enter an industry
In a market system, as one industry expands while another contracts, resources will flow:
A. Away from the expanding industry towards the contracting one
B. From one industry due to the changes in resource prices paid by firms
C. Towards the industry where the product demand is declining
D. Because resource allocation will have to equalize between the two industries
B. From one industry due to the changes in resource prices paid by firms
The development of the digital video and camera which replaced film cameras is an example of:
A. Roundabout production
B. Derived demand
C. Creative destruction
D. Specialization
C. Creative destruction
Which of the following does not illustrate the idea of creative destruction?
A. Digital downloads have shrunk the market for CDs and DVDs
B. Online retail sales have increased, while brick-&-mortar sales have slowed down
C. The opening of a new mall reduces the traffic in another mall
D. A firm has to destroy some of the expired products in its inventory
D. A firm has to destroy some of the expired products in its inventory
The idea that the desires of resource suppliers and firms to further their own self-interest will automatically further the public interest is known as:
A. Consumer sovereignty
B. The invisible hand
C. Derived demand
D. Creative destruction
B. The invisible hand
The major virtues of the market system include all of the following, except:
A. It promotes an efficient allocation of resources
B. It leads to equality in the distribution of income
C. It provides incentives for greater production and higher incomes
D. It emphasizes the freedom to pursue self-interest
B. It leads to equality in the distribution of income
The market economy is regarded as “efficient” in that:
A. It achieves the lowest rate of unemployment
B. It leads to the lowest level of poverty in the society
C. It directs resources towards products that the society wants most
D. It puts the best people in government positions
C. It directs resources towards products that the society wants most
One basic problem faced by central planners, but hardly present in a market system, has to do with:
A. Determining the production goals or targets in a factory
B. Having limited resources and trying to match them with unlimited wants
C. Coordinating production in various industries so that bottlenecks do not develop
D. Providing financial resources for increasing the real flows of products in the economy
C. Coordinating production in various industries so that bottlenecks do not develop
A characteristic of centrally planned economies is that:
A. The price is relatively unimportant in allocating resources
B. Output reflects the pattern of consumer spending
C. Entrepreneurship is quite prevalent and highly rewarded
D. There are many incentives for innovation and hard work
A. The price is relatively unimportant in allocating resources
Which is true of an economy which operates entirely through central planning?
A. Individual economic incentive is reduced by the absence of the profit motive
B. There is relative ease in matching resource allocation to consumer demand
C. Central planners receive market information through the price mechanism
D. The system adapts easily to technological change
A. Individual economic incentive is reduced by the absence of the profit motive
n the circular flow model of the market system, households:
A. Buy products and resources
B. Sell products and resources
C. Buy products and sell resources
D. Sell products and buy resources
C. Buy products and sell resources
In the circular flow model of the market system, business firms:
A. Buy products and resources
B. Sell products and resources
C. Buy products and sell resources
D. Sell products and buy resources
D. Sell products and buy resources
The simple circular flow model shows that workers and capital-owners offer their services to firms through the:
A. Product markets
B. Resource markets
C. Employment agencies
D. Government agencies
According to the circular flow model, product markets are where:
A. Households earn their money incomes
B. Businesses incur their consumption expenditures to households
C. Businesses acquire their inputs from households
D. Businesses earn their revenues from households
D. Businesses earn their revenues from households
In a market system, the task of assessing and managing the business risk of a firm is taken on by the firm’s:
A. Labor
B. Capital suppliers
C. Entrepreneurs
D. Customers
D. Businesses earn their revenues from households
Which of the following guides sensible decisions regarding the management of business risk in a market system?
A. The profit and loss system
B. The “invisible hand”
C. Taxes and subsidies
D. Consumer sovereignty
A. The profit and loss system

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