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Shop What's New Sign inTest Bank For Economics: Principles, Problems, and Policies, 19th Edition
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Chapter 02 – The Market System and the Circular Flow
Chapter 02
The Market System and the Circular Flow
Multiple Choice Questions
1. Which of the following is a distinguishing feature of a command system?
A. private ownership of all capital.
B. central planning.
C. heavy reliance on markets.
D. wide-spread dispersion of economic power.
2. Which of the following is a distinguishing feature of a market system?
A. public ownership of all capital.
B. central planning.
C. wide-spread private ownership of capital.
D. a circular flow of goods, resources, and money.
3. Examples of command economies are:
A. The United States and Japan.
B. Sweden and Norway.
C. Mexico and Brazil.
D. Cuba and North Korea.
4. Of the following countries, which one best exhibits the characteristics of a market
economy?
A. Canada.
B. Cuba.
C. North Korea.
D. China.
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Chapter 02 – The Market System and the Circular Flow
5. The French term “laissez-faire” means:
A. “there is no free lunch.”
B. “let it be.”
C. “circular flow.”
D. “public ownership.”
6. An economic system:
A. requires a grouping of private markets linked to one another.
B. is a particular set of institutional arrangements and a coordinating mechanism used to
respond to the economizing problem.
C. requires some sort of centralized authority (such as government) to coordinate economic
activity.
D. is a plan or scheme that allows a firm to make money at some other firm’s expense.
7. The term laissez-faire suggests that:
A. land and other natural resources should be privately owned, but capital should be publicly
owned.
B. land and other natural resources should be publicly owned, but capital should be privately
owned.
C. government should not interfere with the operation of the economy.
D. government action is necessary if the economy is to achieve full employment and full
production.
8. Economic systems differ according to which two main characteristics?
A. Who owns the factors of production, and the methods used to coordinate economic
activity.
B. The technology used in production, and the quantity and quality of natural resources.
C. How goods are produced, and who gets them.
D. The political system in place, and the degree of scarcity facing the economy.
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Chapter 02 – The Market System and the Circular Flow
9. Command systems are also known as:
A. market systems.
B. pure capitalism.
C. laissez-faire capitalism.
D. communism.
10. A fundamental difference between the command system and the market system is that, in
command systems:
A. the division of output is decided by central planning rather than by individuals operating
freely through markets.
B. all economic decisions are made by the government, whereas there is no government in a
market system.
C. scarcity does not exist, whereas it does in a market system.
D. money is not used, whereas it is in a market system.
11. Which of the following is not a characteristic of the market system?
A. private property.
B. freedom of enterprise.
C. government ownership of major industries.
D. competition in product and resource markets.
12. Which of the following is a fundamental characteristic of the market system?
A. property rights.
B. central planning by government.
C. unselfish behavior.
D. government-set wages and prices.
13. Property rights are important because they:
A. ensure an equal distribution of income.
B. encourage cooperation by improving the chances of mutually agreeable transactions.
C. guarantee that any exchange will make all parties better off than prior to the exchange.
D. allow the government to control how resources are allocated.
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Chapter 02 – The Market System and the Circular Flow
14. Private property:
A. discourages cooperation because people don’t want to part with what they own.
B. discourages innovation, as people are often afraid to risk losing their own property.
C. encourages owners to maintain or improve their property, so as to preserve or enhance
value.
D. does everything indicated by the other answers.
15. Copyrights and trademarks are examples of:
A. capital goods.
B. human capital.
C. property rights.
D. public goods.
16. The regulatory mechanism of the market system is:
A. self-interest.
B. private property.
C. competition.
D. specialization.
17. Broadly defined, competition involves:
A. private property and freedom of expression.
B. independently acting buyers and sellers and freedom to enter or leave markets.
C. increasing opportunity costs and diminishing marginal utility.
D. capital goods and division of labor.
18. Competition means that:
A. sellers can manipulate market price by causing product scarcities.
B. there are independently-acting buyers and sellers in each market.
C. a product can be purchased at a number of different prices.
D. there is more than one seller in a market.
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Chapter 02 – The Market System and the Circular Flow
19. The division of labor means that:
A. labor markets are geographically segmented.
B. unskilled workers outnumber skilled workers.
C. workers specialize in various production tasks.
D. each worker performs a large number of tasks.
20. Specialization in production is important primarily because it:
A. results in greater total output.
B. allows society to avoid the coincidence-of-wants problem.
C. allows society to trade by barter.
D. allows society to have fewer capital goods.
21. Specialization-the division of labor-enhances productivity and efficiency by:
A. allowing workers to take advantage of existing differences in their abilities and skills.
B. avoiding the time loss involved in shifting from one production task to another.
C. allowing workers to develop skills by working on one, or a limited number, of tasks.
D. all of the means identified in the other answers.
22. Specialization in production is economically beneficial primarily because it:
A. allows everyone to have a job which they like.
B. permits the production of a larger output with fixed amounts of resources.
C. facilitates trade by bartering.
D. guarantees full employment.
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Chapter 02 – The Market System and the Circular Flow
23. On the basis of the above information it can be said that:
A. no coincidence of wants exists between any two states.
B. a coincidence of wants exists between Michigan and Washington.
C. a coincidence of wants exists between Texas and Washington.
D. a coincidence of wants exists between Michigan and Texas.
24. On the basis of the above information and assuming trade occurs between the three states
we can expect:
A. Washington to exchange apples with Texas and receive money in return.
B. Washington to exchange apples with Michigan and receive money in return.
C. Texas to exchange lettuce with Michigan and receive autos in return.
D. Texas to trade lettuce directly for Washington apples.
25. Given the above information and assuming trade occurs between the three states we can
expect:
A. that there is no means by which Michigan can obtain lettuce while specializing in the
production of autos.
B. that money will not be needed to accomplish the desired exchanges.
C. money to flow counterclockwise from Michigan to Texas to Washington.
D. money to flow clockwise from Michigan to Washington to Texas.
26. Barter:
A. is the major means of exchange in centrally planned economies.
B. accounts for over 30 percent of the dollar volume of all exchange in the U.S. economy.
C. entails the exchange of goods for goods.
D. is used to circumvent the problem of a lack of coincidence of wants among potential
buyers and sellers.
27. The “coincidence of wants” problem associated with barter refers to the fact that:
A. for exchange to occur each seller must have a product that some buyer wants.
B. money must be used as a medium of exchange or trade will never occur.
C. specialization is restricted by the size or scope of a market.
D. buyers in resource markets and sellers in product markets can never engage in exchange.
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Chapter 02 – The Market System and the Circular Flow
28. The use of money contributes to economic efficiency because:
A. governmental direction of the production and distribution of output can be avoided by
using money.
B. roundabout production could not occur without the availability of money.
C. it is necessary for the creation of capital goods.
D. it promotes specialization by overcoming the problems with barter.
29. The presence of market failures implies that:
A. money is not an effective tool for exchange in a market system.
B. there is an active role for government, even in a market system.
C. individuals and firms should strive to be self-sufficient rather than specialize.
D. command systems are superior to market systems in the allocation of resources.
30. Which of the following characteristics is least unique to a market system?
A. private ownership of property resources
B. competition among buyers and sellers pursuing monetary returns
C. the widespread use of money
D. freedom of enterprise and choice
31. Which of the following is one of the Five Fundamental Questions?
A. Which products will be in scarce supply and which in excess supply?
B. Who should appoint the head of the central bank?
C. How much should society save?
D. What goods and services will be produced?
32. If competitive industry Z is making substantial economic profit, output will:
A. fall in industry Z, and firms will likely leave the market.
B. fall in all industries except industry Z.
C. expand in industry Z, as more resources will move to that industry.
D. expand in industry Z, but no new firms will enter the market.
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Chapter 02 – The Market System and the Circular Flow
33. From society’s point of view the economic function of profits and losses is to:
A. promote the equal distribution of real assets and wealth.
B. achieve full employment and price level stability.
C. contribute to a more equal distribution of income.
D. reallocate resources from less desired to more desired uses.
34. In a market economy a significant change in consumers’ desire for product X will:
A. alter the profits or losses received by suppliers of product X.
B. cause a reallocation of scarce resources.
C. cause some industries to expand and others to contract.
D. do all of these.
35. Economic profits in an industry suggest the industry:
A. can earn more profits by increasing product price.
B. should be larger to better satisfy consumers’ desire for the product.
C. has excess production capacity.
D. is the size that consumers want it to be.
36. Economic profits and losses:
A. are both considered by economists to be a part of production costs.
B. are essential to the reallocation of resources from less desired to more desired goods.
C. have no influence on the composition of domestic output.
D. equalize the distribution of income in the long run.
37. If consumer desire for product X increases, all of the following will occur except:
A. an increase in the profits of industry X.
B. an increase in the quantity of resources employed by industry X.
C. an increase in the output of industry X.
D. a decrease in the quantity of resources employed in industry X.
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Chapter 02 – The Market System and the Circular Flow
38. An increase in consumer desire for strawberries is most likely to:
A. increase the number of strawberry pickers needed by farmers.
B. reduce the supply of strawberries.
C. reduce the number of people willing to pick strawberries.
D. reduce the need for strawberry pickers.
39. If competitive industry Y is incurring substantial losses, output will:
A. expand as resources move toward industry Y.
B. contract as resources move toward industry Y.
C. contract as resources move away from industry Y.
D. expand as resources move away from industry Y.
40. The economic function of profits and losses is to:
A. bring about a more equal distribution of income.
B. signal that resources should be reallocated.
C. eliminate small firms and reduce competition.
D. tell government which industries need to be subsidized.
41. If a competitive industry is neither expanding nor contracting, we would expect:
A. total revenue to be zero.
B. economic profits to be zero.
C. total opportunity cost to be zero.
D. more resources to flow to that industry.
42. The competitive market system:
A. encourages innovation because government provides tax breaks and subsidies to those who
develop new products or new productive techniques.
B. discourages innovation because it is difficult to acquire additional capital in the form of
new machinery and equipment.
C. discourages innovation because firms want to get all the profits possible from existing
machinery and equipment.
D. encourages innovation because successful innovators are rewarded with economic profits.
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Chapter 02 – The Market System and the Circular Flow
43. In a market economy the distribution of output will be determined primarily by:
A. consumer needs and preferences.
B. the quantities and prices of the resources that households supply.
C. government regulations that provide a minimum income for all.
D. a social consensus as to which distribution of income is most equitable.
44. The most efficient combination of resources in producing a given output is the
combination that:
A. comes closest to using the same quantities of land, labor, capital, and entrepreneurial
ability.
B. can be obtained for the smallest money outlay.
C. uses the smallest total quantity of all resources.
D. conserves most on the use of labor.
45. Firms are motivated to minimize production costs because:
A. it is the most environmentally friendly way to produce goods.
B. least-cost production techniques use the smallest total quantity of resources.
C. competitive pressures in the market will drive out higher-cost producers.
D. the government provides tax credits and subsidies to low-cost producers.
Answer the question using the following data which show all available techniques for
producing 20 units of a particular commodity:
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Chapter 02 – The Market System and the Circular Flow
46. Refer to the above data. In view of the indicated resource prices, the economically most
efficient production technique(s) is (are) technique(s):
A. #1.
B. #2 and #4.
C. #3.
D. #1 and #3.
47. Refer to the above data. Assuming that the firm is motivated by self-interest and that the
20 units which can be produced with each technique can be sold for $2 per unit, the firm will:
A. realize an economic profit of $10.
B. realize an economic profit of $4.
C. not earn any economic profit.
D. shutdown rather than incur a loss by producing.
48. Refer to the above data. If a new production technique is developed that enables a firm to
produce 20 units of output with 3 units of land, 3 of labor, 1 of capital, and 2 of
entrepreneurial ability, this technique would:
A. not be adopted because, although it reduces production costs, it does not increase profit.
B. be adopted because it would lower production costs and increase economic profit.
C. not be adopted because it entails higher production costs than other available techniques.
D. be adopted, even though economic profits would be reduced slightly.
Answer the question on the basis of the following information: Suppose 30 units of product
A can be produced by employing just labor and capital in the four ways shown below.
Assume the prices of labor and capital are $2 and $3 respectively.
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Chapter 02 – The Market System and the Circular Flow
49. Refer to the above information. Which technique is economically most efficient in
producing A?
A. I
B. II
C. III
D. IV
50. Refer to the above information. If the price of product A is $0.50, the firm will realize:
A. an economic profit of $4.
B. an economic profit of $2.
C. an economic profit of $6.
D. a loss of $3.
51. In a competitive market economy firms select the least-cost production technique
because:
A. such choices will result in full employment of available resources.
B. to do so will maximize the firms’ profits.
C. this will prevent new firms from entering the industry.
D. “dollar voting” by consumers mandates such a choice.
52. The market system’s answer to the fundamental question “What will be produced?” is
essentially:
A. “Goods and services that are profitable.”
B. “Low cost goods and services.”
C. “Goods and service that can be produced using large amounts of capital.”
D. “Goods and services that possess lasting value.”
53. The market system’s answer to the fundamental question “How will the goods and
services be produced?” is essentially:
A. “With as much machinery as possible.”
B. “Using the latest technology.”
C. “By exploiting labor.”
D. “Using the least-cost production techniques.”
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Chapter 02 – The Market System and the Circular Flow
54. The market system’s answer to the fundamental question “Who will get the goods and
services?” is essentially:
A. “Those willing and able to pay for them.”
B. “Those who physically produced them.”
C. “Those who most need them.”
D. “Those who get utility from them.”
55. The market system’s answer to the fundamental question “How will the system
accommodate change?” is essentially:
A. “Through government leadership and direction.”
B. “Through the guiding function of prices and the incentive function of profits.”
C. “Through training and retraining programs.”
D. “Through trial and error.”
56. The market system’s answer to the fundamental question “How will the system promote
progress?” is essentially:
A. “Through government funded research programs.”
B. “Through redistribution of income to promote greater equality.”
C. “Through training and retraining programs.”
D. “Through the profit potential that encourages development of new technology.”
57. The advent of DVDs has virtually demolished the market for videocassettes. This is an
example of:
A. creative destruction.
B. derived demand.
C. capital accumulation.
D. the difference between normal and economic profits.
58. “Consumer sovereignty” refers to the:
A. fact that resource prices are higher than product prices in capitalistic economies.
B. idea that the pursuit of self-interest is in the public interest.
C. idea that the decisions of producers must ultimately conform to consumer demands.
D. fact that a Federal agency exists to protect consumers from harmful and defective products.
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Chapter 02 – The Market System and the Circular Flow
59. The dollar votes of consumers ultimately determine the composition of output and the
allocation of resources in a market economy. This statement best describes the concept of:
A. derived demand.
B. consumer sovereignty.
C. the invisible hand.
D. market failure.
60. Which of the following is not one of the five fundamental questions?
A. What prices will be charged for goods and services?
B. Who will get the goods and services?
C. What goods and services will be produced?
D. How will the system promote progress?
61. “Consumer sovereignty” means that:
A. buyers can dictate the prices at which goods and services will be purchased.
B. advertising is ineffective because consumers already know what they want.
C. buyers control the quality of goods and services through regulatory agencies.
D. buyers determine what will be produced based on their “dollar votes” for the goods and
services offered by sellers.
62. Which of the following best describes the invisible-hand concept?
A. The desires of resource suppliers and producers to further their own self-interest will
automatically further the public interest.
B. The non-substitutability of resources creates a conflict between private and public interests
and calls for government intervention.
C. The market system is the best system for overcoming the scarce resources-unlimited wants
problem.
D. Central direction by the government will improve resource allocation in a capitalistic
economy.
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Chapter 02 – The Market System and the Circular Flow
63. The invisible hand refers to the:
A. fact that the U.S. tax system redistributes income from rich to poor.
B. notion that, under competition, decisions motivated by self-interest promote the social
interest.
C. tendency of monopolistic sellers to raise prices above competitive levels.
D. fact that government controls the functioning of the market system.
64. The invisible hand concept suggests that:
A. market failures imply the need for a national economic plan.
B. big businesses are inherently more efficient than small businesses.
C. the competitiveness of a capitalistic market economy invariably diminishes over time.
D. assuming competition, private and public interests will coincide.
65. Two major virtues of the market system are that it:
A. allocates resources efficiently and allows economic freedom.
B. results in an equitable personal distribution of income and always maintains full
employment.
C. results in price level stability and a fair personal distribution of income.
D. eliminates discrimination and minimizes environmental pollution.
66. The market system:
A. produces considerable inefficiency in the use of scarce resources.
B. effectively harnesses the incentives of workers and entrepreneurs.
C. is not consistent with freedom of choice in the long run.
D. has slowly lost ground to emerging command systems.
67. According to the concept of the “invisible hand,” if Susie opens and operates a profitable
childcare center, then:
A. government should regulate the business to ensure quality.
B. the profit Susie earns indicates that she is overcharging for her services.
C. she has served society’s interests by providing a desired good or service.
D. this demonstrates that consumer sovereignty is not present in this market.
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Chapter 02 – The Market System and the Circular Flow
68. The invisible hand promotes society’s interests because:
A. individuals pursuing their self-interest will try to produce goods and services that people in
society want and are willing to purchase.
B. individuals will produce goods for others out of concern for their fellow human beings.
C. it makes sure that everyone wins from competition in the market.
D. government regulation pushes business into producing the right mix of goods and services.
69. The coordination problem in the centrally planned economies refers to the idea that:
A. planners had to direct required inputs to each enterprise.
B. the price level and the level of employment were inversely related.
C. the immediate effect of more investment was less consumption.
D. exports had to be equal to imports for a central plan to work.
70. “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:
A. incentive problem under central planning.
B. coordination problem under central planning.
C. self-sufficiency dilemma under communism.
D. resource over-commitment problem under communism.
71. “Because the outputs of many industries are the inputs to other industries, the failure of
any single industry to fulfill the output quantities specified in the central plan caused a chainreaction of adverse repercussions on production.” This quotation best identifies the:
A. incentive problem under central planning.
B. self-sufficiency dilemma under communism.
C. resource over-commitment problem under communism.
D. coordination problem under central planning.
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Chapter 02 – The Market System and the Circular Flow
72. The incentive problem under communist central planning refers to the idea that:
A. planners had to direct required inputs to each enterprise.
B. workers, managers, and entrepreneurs could not personally gain by responding to shortages
or surpluses or by introducing new and improved products.
C. the immediate effect of more investment was less consumption.
D. exports had to be equal to imports for a central plan to work.
73. Suppose that an individual sees a tremendous opportunity to produce and sell a new
product, but dismisses the idea because there is no way to exploit this opportunity for personal
gain. This situation best identifies the:
A. coordination problem under communist central planning.
B. self-sufficiency dilemma under communism.
C. asymmetric information problem under communism.
D. incentive problem under communist central planning.
74. Innovation lagged in the centrally planned economies because:
A. there was too much domestic business competition.
B. there was too much competition from foreign firms.
C. enterprises resisted innovation in fear that their production targets would be raised.
D. exports had to equal imports for the plan to work.
75. The fact that the major indicator of enterprise success in the Soviet Union and pre-reform
China was the quantity of output implied that:
A. product quality was neglected.
B. production costs were minimized.
C. product-mix met consumer needs.
D. technological advance was too rapid.
76. Enterprise managers and workers in the Soviet Union often resisted innovations in
production methods because:
A. production targets were often increased when innovation occurred.
B. there was a chronic shortage of computers.
C. workers could not be reallocated geographically.
D. innovations ordinarily increased dependence on world markets.
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Chapter 02 – The Market System and the Circular Flow
77. If products were in short or surplus supply in the Soviet Union:
A. price and profit signals eliminated those shortages and surpluses.
B. price and profit signals intensified those shortages and surpluses.
C. producers would not react because no price or profit signals occurred.
D. the planners would immediately adjust production to achieve equilibrium.
78. In what type of business do the owners bear no personal financial responsibility for the
company’s debts and obligations?
A. Partnerships.
B. Corporations.
C. Sole proprietorships.
D. In all of the businesses listed in the other answers.
79. The simple circular flow model shows that:
A. households are on the buying side of both product and resource markets.
B. businesses are on the selling side of both product and resource markets.
C. households are on the selling side of the resource market and on the buying side of the
product market.
D. businesses are on the buying side of the product market and on the selling side of the
resource market.
80. The two basic markets shown by the simple circular flow model are:
A. capital goods and consumer goods.
B. free and controlled.
C. product and resource.
D. household and business.
81. In the resource market:
A. businesses borrow financial capital from households.
B. businesses sell services to households.
C. households sell resources to businesses.
D. firms sell raw materials to households.
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Chapter 02 – The Market System and the Circular Flow
82. In the simple circular flow model:
A. households are buyers of resources.
B. businesses are sellers of final products.
C. households are sellers of final products.
D. there are real flows of goods, services, and resources, but not money flows.
83. Refer to the above diagram. Flow (1) represents:
A. wage, rent, interest, and profit income.
B. land, labor, capital, and entrepreneurial ability.
C. goods and services.
D. consumer expenditures.
84. Refer to the above diagram. Flow (2) represents:
A. wage, rent, interest, and profit income.
B. land, labor, capital, and entrepreneurial ability.
C. goods and services.
D. consumer expenditures.
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Chapter 02 – The Market System and the Circular Flow
85. Refer to the above diagram. Flow (3) represents:
A. wage, rent, interest, and profit income.
B. land, labor, capital, and entrepreneurial ability.
C. goods and services.
D. consumer expenditures.
86. Refer to the above diagram. Flow (4) represents:
A. wage, rent, interest, and profit income.
B. land, labor, capital, and entrepreneurial ability.
C. goods and services.
D. consumer expenditures.
87. In terms of the circular flow diagram, households make expenditures in the _____ market
and receive income through the _____ market.
A. product; financial
B. resource; product
C. product; resource
D. capital; product
88. In terms of the circular flow diagram, businesses obtain revenue through the _____ market
and make expenditures in the _____ market.
A. product; financial
B. resource; product
C. product; resource
D. capital; product
89. Households and businesses are:
A. both buyers in the resource market.
B. both sellers in the product market.
C. sellers in the resource and product markets respectively.
D. sellers in the product and resource markets respectively.
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Chapter 02 – The Market System and the Circular Flow
90. Refer to the above diagram. Arrows (1) and (2) represent:
A. goods and resources respectively.
B. money incomes and output respectively.
C. output and money incomes respectively.
D. resources and goods respectively.
91. Refer to the above diagram. Arrows (3) and (4) represent:
A. goods and services respectively.
B. incomes and consumer expenditures respectively.
C. resources and goods respectively.
D. consumer expenditures and income respectively.
92. Refer to the above diagram. Arrows (1) and (3) are associated with:
A. the money market.
B. the resource market.
C. the product market.
D. international trade.
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Chapter 02 – The Market System and the Circular Flow
93. Which of the following best illustrates the circular flow model in action?
A. Bobbie goes to work and builds cars, and uses the income she receives to buy food at the
grocery store.
B. Evan buys a new couch; the owner of the furniture store uses some of the money from the
sale to pay her supplier, and uses the rest to take her family out to dinner.
C. Boeing experiences a surge in orders for new airplanes, prompting the company to hire
more workers.
D. All of these answers illustrate the workings of the circular flow model.
94. (Consider This) In 1975, McDonald’s introduced its Egg McMuffin breakfast sandwich,
which remains popular and profitable today. This longevity illustrates the idea of:
A. opportunity cost.
B. upsloping supply.
C. consumer sovereignty.
D. specialization.
95. (Consider This) 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:
A. consumer sovereignty.
B. technological change.
C. downsloping demand.
D. specialization.
96. (Consider This) Since World War II:
A. North Korea’s command economy has significantly outperformed South Korea’s market
economy.
B. South Korea’s command economy has significantly outperformed North Korea’s market
economy.
C. North Korea’s market economy has significantly outperformed South Korea’s command
economy.
D. South Korea’s market economy has significantly outperformed North Korea’s command
economy.
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Chapter 02 – The Market System and the Circular Flow
97. (Consider This) North Korea’s command economy:
A. is one of the few remaining command economies.
B. has grown much faster than South Korea since the two countries were divided after World
War II.
C. produces a per capita GDP of nearly $25,000.
D. has undergone significant market reforms and is now one of the fastest growing
economies.
98. (Last Word) According to economist Donald Boudreaux, the world’s tens of billions of
individual resources get arranged productively:
A. because government has become highly effective at central planning.
B. because private property encourages people to consider the alternative uses of their
resources and select those that provide the most rewards.
C. because people tend to be creative and orderly.
D. through random trial and error.
99. (Last Word) According to economist Donald Boudreaux:
A. private property eliminates the possibility that resource arrangements will be random.
B. the market system threatens to do irreparable harm to the world’s ecosystem.
C. arranging resources under the market system is much like shuffling a deck of cards.
D. the market system works wondrously for advanced industrial nations but not for
developing nations.
True / False Questions
100. Market economies use capital goods because they improve productive efficiency.
True False
101. Money functions as a medium of exchange by eliminating the need for a coincidence of
wants.
True False
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Chapter 02 – The Market System and the Circular Flow
102. Consumer sovereignty means that legislation now protects the rights of consumers to
dispose of their incomes as they see fit.
True False
103. Specialization may expand total output even though the individuals involved may have
identical abilities.
True False
104. The wants of consumers are expressed in the product market with “dollar votes.”
True False
105. Costs can be defined as total payments made to workers, land owners, and capital
suppliers less payments to the entrepreneur for organizing and combining the other resources
used to produce a good.
True False
106. Continued losses in an industry will cause some firms to reduce output or eventually
leave the industry.
True False
107. The guiding function of prices tends to keep resources flowing toward their most highly
valued uses.
True False
108. The invisible hand refers to the many indirect controls that the Federal government
imposes in a market system.
True False
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Chapter 02 – The Market System and the Circular Flow
109. Central planning in the Soviet Union and pre-reform China emphasized the expansion of
the production of consumer goods to raise the domestic standard of living.
True False
110. Central planning often suffers from a coordination problem and an incentive problem.
True False
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Chapter 02 – The Market System and the Circular Flow
Chapter 02 The Market System and the Circular Flow Answer Key
Multiple Choice Questions
1. Which of the following is a distinguishing feature of a command system?
A. private ownership of all capital.
B. central planning.
C. heavy reliance on markets.
D. wide-spread dispersion of economic power.
AACSB: Analytic
Bloom’s: Level 1 Remember
Difficulty: 1 Easy
Learning Objective: 02-01 Differentiate between a command system and a market system.
Topic: Economic systems
2. Which of the following is a distinguishing feature of a market system?
A. public ownership of all capital.
B. central planning.
C. wide-spread private ownership of capital.
D. a circular flow of goods, resources, and money.
AACSB: Analytic
Bloom’s: Level 1 Remember
Difficulty: 1 Easy
Learning Objective: 02-01 Differentiate between a command system and a market system.
Topic: Economic systems
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any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 02 – The Market System and the Circular Flow
3. Examples of command economies are:
A. The United States and Japan.
B. Sweden and Norway.
C. Mexico and Brazil.
D. Cuba and North Korea.
AACSB: Reflective Thinking
Bloom’s: Level 3 Apply
Difficulty: 2 Medium
Learning Objective: 02-01 Differentiate between a command system and a market system.
Topic: Economic systems
4. Of the following countries, which one best exhibits the characteristics of a market
economy?
A. Canada.
B. Cuba.
C. North Korea.
D. China.
AACSB: Reflective Thinking
Bloom’s: Level 3 Apply
Difficulty: 2 Medium
Learning Objective: 02-01 Differentiate between a command system and a market system.
Topic: Economic systems
5. The French term “laissez-faire” means:
A. “there is no free lunch.”
B. “let it be.”
C. “circular flow.”
D. “public ownership.”
AACSB: Analytic
Bloom’s: Level 1 Remember
Difficulty: 1 Easy
Learning Objective: 02-01 Differentiate between a command system and a market system.
Topic: Economic systems
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any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 02 – The Market System and the Circular Flow
6. An economic system:
A. requires a grouping of private markets linked to one another.
B. is a particular set of institutional arrangements and a coordinating mechanism used to
respond to the economizing problem.
C. requires some sort of centralized authority (such as government) to coordinate economic
activity.
D. is a plan or scheme that allows a firm to make money at some other firm’s expense.
AACSB: Analytic
Bloom’s: Level 1 Remember
Difficulty: 1 Easy
Learning Objective: 02-01 Differentiate between a command system and a market system.
Topic: Economic systems
7. The term laissez-faire suggests that:
A. land and other natural resources should be privately owned, but capital should be publicly
owned.
B. land and other natural resources should be publicly owned, but capital should be privately
owned.
C. government should not interfere with the operation of the economy.
D. government action is necessary if the economy is to achieve full employment and full
production.
AACSB: Analytic
Bloom’s: Level 2 Understand
Difficulty: 2 Medium
Learning Objective: 02-01 Differentiate between a command system and a market system.
Topic: Economic systems
8. Economic systems differ according to which two main characteristics?
A. Who owns the factors of production, and the methods used to coordinate economic
activity.
B. The technology used in production, and the quantity and quality of natural resources.
C. How goods are produced, and who gets them.
D. The political system in place, and the degree of scarcity facing the economy.
AACSB: Analytic
Bloom’s: Level 1 Remember
Difficulty: 1 Easy
Learning Objective: 02-01 Differentiate between a command system and a market system.
Topic: Economic systems
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any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 02 – The Market System and the Circular Flow
9. Command systems are also known as:
A. market systems.
B. pure capitalism.
C. laissez-faire capitalism.
D. communism.
AACSB: Analytic
Bloom’s: Level 1 Remember
Difficulty: 1 Easy
Learning Objective: 02-01 Differentiate between a command system and a market system.
Topic: Economic systems
10. A fundamental difference between the command system and the market system is that, in
command systems:
A. the division of output is decided by central planning rather than by individuals operating
freely through markets.
B. all economic decisions are made by the government, whereas there is no government in a
market system.
C. scarcity does not exist, whereas it does in a market system.
D. money is not used, whereas it is in a market system.
AACSB: Analytic
Bloom’s: Level 2 Understand
Difficulty: 2 Medium
Learning Objective: 02-01 Differentiate between a command system and a market system.
Topic: Economic systems
11. Which of the following is not a characteristic of the market system?
A. private property.
B. freedom of enterprise.
C. government ownership of major industries.
D. competition in product and resource markets.
AACSB: Analytic
Bloom’s: Level 1 Remember
Difficulty: 1 Easy
Learning Objective: 02-02 List the main characteristics of the market system.
Topic: Characteristics of the market system
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any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 02 – The Market System and the Circular Flow
12. Which of the following is a fundamental characteristic of the market system?
A. property rights.
B. central planning by government.
C. unselfish behavior.
D. government-set wages and prices.
AACSB: Analytic
Bloom’s: Level 1 Remember
Difficulty: 1 Easy
Learning Objective: 02-02 List the main characteristics of the market system.
Topic: Characteristics of the market system
13. Property rights are important because they:
A. ensure an equal distribution of income.
B. encourage cooperation by improving the chances of mutually agreeable transactions.
C. guarantee that any exchange will make all parties better off than prior to the exchange.
D. allow the government to control how resources are allocated.
AACSB: Analytic
Bloom’s: Level 2 Understand
Difficulty: 2 Medium
Learning Objective: 02-02 List the main characteristics of the market system.
Status: New
Topic: Characteristics of the market system
14. Private property:
A. discourages cooperation because people don’t want to part with what they own.
B. discourages innovation, as people are often afraid to risk losing their own property.
C. encourages owners to maintain or improve their property, so as to preserve or enhance
value.
D. does everything indicated by the other answers.
AACSB: Analytic
Bloom’s: Level 2 Understand
Difficulty: 2 Medium
Learning Objective: 02-02 List the main characteristics of the market system.
Status: New
Topic: Characteristics of the market system
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any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 02 – The Market System and the Circular Flow
15. Copyrights and trademarks are examples of:
A. capital goods.
B. human capital.
C. property rights.
D. public goods.
AACSB: Analytic
Bloom’s: Level 2 Understand
Difficulty: 2 Medium
Learning Objective: 02-02 List the main characteristics of the market system.
Topic: Characteristics of the market system
16. The regulatory mechanism of the market system is:
A. self-interest.
B. private property.
C. competition.
D. specialization.
AACSB: Analytic
Bloom’s: Level 2 Understand
Difficulty: 2 Medium
Learning Objective: 02-02 List the main characteristics of the market system.
Topic: Characteristics of the market system
17. Broadly defined, competition involves:
A. private property and freedom of expression.
B. independently acting buyers and sellers and freedom to enter or leave markets.
C. increasing opportunity costs and diminishing marginal utility.
D. capital goods and division of labor.
AACSB: Analytic
Bloom’s: Level 1 Remember
Difficulty: 1 Easy
Learning Objective: 02-02 List the main characteristics of the market system.
Topic: Characteristics of the market system
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any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 02 – The Market System and the Circular Flow
18. Competition means that:
A. sellers can manipulate market price by causing product scarcities.
B. there are independently-acting buyers and sellers in each market.
C. a product can be purchased at a number of different prices.
D. there is more than one seller in a market.
AACSB: Analytic
Bloom’s: Level 2 Understand
Difficulty: 2 Medium
Learning Objective: 02-02 List the main characteristics of the market system.
Topic: Characteristics of the market system
19. The division of labor means that:
A. labor markets are geographically segmented.
B. unskilled workers outnumber skilled workers.
C. workers specialize in various production tasks.
D. each worker performs a large number of tasks.
AACSB: Analytic
Bloom’s: Level 1 Remember
Difficulty: 1 Easy
Learning Objective: 02-02 List the main characteristics of the market system.
Topic: Characteristics of the market system
20. Specialization in production is important primarily because it:
A. results in greater total output.
B. allows society to avoid the coincidence-of-wants problem.
C. allows society to trade by barter.
D. allows society to have fewer capital goods.
AACSB: Analytic
Bloom’s: Level 2 Understand
Difficulty: 2 Medium
Learning Objective: 02-02 List the main characteristics of the market system.
Topic: Characteristics of the market system
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any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 02 – The Market System and the Circular Flow
21. Specialization-the division of labor-enhances productivity and efficiency by:
A. allowing workers to take advantage of existing differences in their abilities and skills.
B. avoiding the time loss involved in shifting from one production task to another.
C. allowing workers to develop skills by working on one, or a limited number, of tasks.
D. all of the means identified in the other answers.
AACSB: Analytic
Bloom’s: Level 2 Understand
Difficulty: 2 Medium
Learning Objective: 02-02 List the main characteristics of the market system.
Topic: Characteristics of the market system
22. Specialization in production is economically beneficial primarily because it:
A. allows everyone to have a job which they like.
B. permits the production of a larger output with fixed amounts of resources.
C. facilitates trade by bartering.
D. guarantees full employment.
AACSB: Analytic
Bloom’s: Level 2 Understand
Difficulty: 2 Medium
Learning Objective: 02-02 List the main characteristics of the market system.
Topic: Characteristics of the market system
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any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 02 – The Market System and the Circular Flow
23. On the basis of the above information it can be said that:
A. no coincidence of wants exists between any two states.
B. a coincidence of wants exists between Michigan and Washington.
C. a coincidence of wants exists between Texas and Washington.
D. a coincidence of wants exists between Michigan and Texas.
AACSB: Analytic
Bloom’s: Level 2 Understand
Difficulty: 2 Medium
Learning Objective: 02-02 List the main characteristics of the market system.
Topic: Characteristics of the market system
Type: Figure
24. On the basis of the above information and assuming trade occurs between the three states
we can expect:
A. Washington to exchange apples with Texas and receive money in return.
B. Washington to exchange apples with Michigan and receive money in return.
C. Texas to exchange lettuce with Michigan and receive autos in return.
D. Texas to trade lettuce directly for Washington apples.
AACSB: Reflective Thinking
Bloom’s: Level 3 Apply
Difficulty: 2 Medium
Learning Objective: 02-02 List the main characteristics of the market system.
Topic: Characteristics of the market system
Type: Figure
25. Given the above information and assuming trade occurs between the three states we can
expect:
A. that there is no means by which Michigan can obtain lettuce while specializing in the
production of autos.
B. that money will not be needed to accomplish the desired exchanges.
C. money to flow counterclockwise from Michigan to Texas to Washington.
D. money to flow clockwise from Michigan to Washington to Texas.
AACSB: Reflective Thinking
Bloom’s: Level 3 Apply
Difficulty: 2 Medium
Learning Objective: 02-02 List the main characteristics of the market system.
Topic: Characteristics of the market system
Type: Figure
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any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 02 – The Market System and the Circular Flow
26. Barter:
A. is the major means of exchange in centrally planned economies.
B. accounts for over 30 percent of the dollar volume of all exchange in the U.S. economy.
C. entails the exchange of goods for goods.
D. is used to circumvent the problem of a lack of coincidence of wants among potential
buyers and sellers.
AACSB: Analytic
Bloom’s: Level 1 Remember
Difficulty: 1 Easy
Learning Objective: 02-02 List the main characteristics of the market system.
Topic: Characteristics of the market system
27. The “coincidence of wants” problem associated with barter refers to the fact that:
A. for exchange to occur each seller must have a product that some buyer wants.
B. money must be used as a medium of exchange or trade will never occur.
C. specialization is restricted by the size or scope of a market.
D. buyers in resource markets and sellers in product markets can never engage in exchange.
AACSB: Analytic
Bloom’s: Level 2 Understand
Difficulty: 2 Medium
Learning Objective: 02-02 List the main characteristics of the market system.
Topic: Characteristics of the market system
28. The use of money contributes to economic efficiency because:
A. governmental direction of the production and distribution of output can be avoided by
using money.
B. roundabout production could not occur without the availability of money.
C. it is necessary for the creation of capital goods.
D. it promotes specialization by overcoming the problems with barter.
AACSB: Analytic
Bloom’s: Level 2 Understand
Difficulty: 2 Medium
Learning Objective: 02-02 List the main characteristics of the market system.
Topic: Characteristics of the market system
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any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 02 – The Market System and the Circular Flow
29. The presence of market failures implies that:
A. money is not an effective tool for exchange in a market system.
B. there is an active role for government, even in a market system.
C. individuals and firms should strive to be self-sufficient rather than specialize.
D. command systems are superior to market systems in the allocation of resources.
AACSB: Analytic
Bloom’s: Level 2 Understand
Difficulty: 2 Medium
Learning Objective: 02-02 List the main characteristics of the market system.
Topic: Characteristics of the market system
30. Which of the following characteristics is least unique to a market system?
A. private ownership of property resources
B. competition among buyers and sellers pursuing monetary returns
C. the widespread use of money
D. freedom of enterprise and choice
AACSB: Analytic
Bloom’s: Level 2 Understand
Difficulty: 2 Medium
Learning Objective: 02-02 List the main characteristics of the market system.
Topic: Characteristics of the market system
31. Which of the following is one of the Five Fundamental Questions?
A. Which products will be in scarce supply and which in excess supply?
B. Who should appoint the head of the central bank?
C. How much should society save?
D. What goods and services will be produced?
AACSB: Analytic
Bloom’s: Level 1 Remember
Difficulty: 1 Easy
Learning Objective: 02-03 Explain how the market system decides what to produce; how to produce it; and who obtains it.
Topic: Five fundamental questions
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any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 02 – The Market System and the Circular Flow
32. If competitive industry Z is making substantial economic profit, output will:
A. fall in industry Z, and firms will likely leave the market.
B. fall in all industries except industry Z.
C. expand in industry Z, as more resources will move to that industry.
D. expand in industry Z, but no new firms will enter the market.
AACSB: Reflective Thinking
Bloom’s: Level 3 Apply
Difficulty: 2 Medium
Learning Objective: 02-03 Explain how the market system decides what to produce; how to produce it; and who obtains it.
Learning Objective: 02-04 Discuss how the market system adjusts to change and promotes progress.
Topic: Five fundamental questions
33. From society’s point of view the economic function of profits and losses is to:
A. promote the equal distribution of real assets and wealth.
B. achieve full employment and price level stability.
C. contribute to a more equal distribution of income.
D. reallocate resources from less desired to more desired uses.
AACSB: Reflective Thinking
Bloom’s: Level 2 Understand
Difficulty: 2 Medium
Learning Objective: 02-03 Explain how the market system decides what to produce; how to produce it; and who obtains it.
Learning Objective: 02-04 Discuss how the market system adjusts to change and promotes progress.
Topic: Five fundamental questions
34. In a market economy a significant change in consumers’ desire for product X will:
A. alter the profits or losses received by suppliers of product X.
B. cause a reallocation of scarce resources.
C. cause some industries to expand and others to contract.
D. do all of these.
AACSB: Reflective Thinking
Bloom’s: Level 3 Apply
Difficulty: 2 Medium
Learning Objective: 02-03 Explain how the market system decides what to produce; how to produce it; and who obtains it.
Learning Objective: 02-04 Discuss how the market system adjusts to change and promotes progress.
Topic: Five fundamental questions
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any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 02 – The Market System and the Circular Flow
35. Economic profits in an industry suggest the industry:
A. can earn more profits by increasing product price.
B. should be larger to better satisfy consumers’ desire for the product.
C. has excess production capacity.
D. is the size that consumers want it to be.
AACSB: Reflective Thinking
Bloom’s: Level 4 Analyze
Difficulty: 3 Hard
Learning Objective: 02-03 Explain how the market system decides what to produce; how to produce it; and who obtains it.
Topic: Five fundamental questions
36. Economic profits and losses:
A. are both considered by economists to be a part of production costs.
B. are essential to the reallocation of resources from less desired to more desired goods.
C. have no influence on the composition of domestic output.
D. equalize the distribution of income in the long run.
AACSB: Analytic
Bloom’s: Level 2 Understand
Difficulty: 2 Medium
Learning Objective: 02-03 Explain how the market system decides what to produce; how to produce it; and who obtains it.
Learning Objective: 02-04 Discuss how the market system adjusts to change and promotes progress.
Topic: Five fundamental questions
37. If consumer desire for product X increases, all of the following will occur except:
A. an increase in the profits of industry X.
B. an increase in the quantity of resources employed by industry X.
C. an increase in the output of industry X.
D. a decrease in the quantity of resources employed in industry X.
AACSB: Reflective Thinking
Bloom’s: Level 3 Apply
Difficulty: 2 Medium
Learning Objective: 02-03 Explain how the market system decides what to produce; how to produce it; and who obtains it.
Learning Objective: 02-04 Discuss how the market system adjusts to change and promotes progress.
Topic: Five fundamental questions
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any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 02 – The Market System and the Circular Flow
38. An increase in consumer desire for strawberries is most likely to:
A. increase the number of strawberry pickers needed by farmers.
B. reduce the supply of strawberries.
C. reduce the number of people willing to pick strawberries.
D. reduce the need for strawberry pickers.
AACSB: Reflective Thinking
Bloom’s: Level 3 Apply
Difficulty: 2 Medium
Learning Objective: 02-03 Explain how the market system decides what to produce; how to produce it; and who obtains it.
Learning Objective: 02-04 Discuss how the market system adjusts to change and promotes progress.
Topic: Five fundamental questions
39. If competitive industry Y is incurring substantial losses, output will:
A. expand as resources move toward industry Y.
B. contract as resources move toward industry Y.
C. contract as resources move away from industry Y.
D. expand as resources move away from industry Y.
AACSB: Reflective Thinking
Bloom’s: Level 2 Understand
Difficulty: 2 Medium
Learning Objective: 02-03 Explain how the market system decides what to produce; how to produce it; and who obtains it.
Learning Objective: 02-04 Discuss how the market system adjusts to change and promotes progress.
Topic: Five fundamental questions
40. The economic function of profits and losses is to:
A. bring about a more equal distribution of income.
B. signal that resources should be reallocated.
C. eliminate small firms and reduce competition.
D. tell government which industries need to be subsidized.
AACSB: Analytic
Bloom’s: Level 2 Understand
Difficulty: 2 Medium
Learning Objective: 02-03 Explain how the market system decides what to produce; how to produce it; and who obtains it.
Learning Objective: 02-04 Discuss how the market system adjusts to change and promotes progress.
Topic: Five fundamental questions
2-39
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any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 02 – The Market System and the Circular Flow
41. If a competitive industry is neither expanding nor contracting, we would expect:
A. total revenue to be zero.
B. economic profits to be zero.
C. total opportunity cost to be zero.
D. more resources to flow to that industry.
AACSB: Reflective Thinking
Bloom’s: Level 2 Understand
Difficulty: 2 Medium
Learning Objective: 02-03 Explain how the market system decides what to produce; how to produce it; and who obtains it.
Topic: Five fundamental questions
42. The competitive market system:
A. encourages innovation because government provides tax breaks and subsidies to those who
develop new products or new productive techniques.
B. discourages innovation because it is difficult to acquire additional capital in the form of
new machinery and equipment.
C. discourages innovation because firms want to get all the profits possible from existing
machinery and equipment.
D. encourages innovation because successful innovators are rewarded with economic profits.
AACSB: Reflective Thinking
Bloom’s: Level 2 Understand
Difficulty: 2 Medium
Learning Objective: 02-04 Discuss how the market system adjusts to change and promotes progress.
Topic: Five fundamental questions
43. In a market economy the distribution of output will be determined primarily by:
A. consumer needs and preferences.
B. the quantities and prices of the resources that households supply.
C. government regulations that provide a minimum income for all.
D. a social consensus as to which distribution of income is most equitable.
AACSB: Analytic
Bloom’s: Level 2 Understand
Difficulty: 2 Medium
Learning Objective: 02-03 Explain how the market system decides what to produce; how to produce it; and who obtains it.
Topic: Five fundamental questions
2-40
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any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 02 – The Market System and the Circular Flow
44. The most efficient combination of resources in producing a given output is the
combination that:
A. comes closest to using the same quantities of land, labor, capital, and entrepreneurial
ability.
B. can be obtained for the smallest money outlay.
C. uses the smallest total quantity of all resources.
D. conserves most on the use of labor.
AACSB: Analytic
Bloom’s: Level 1 Remember
Difficulty: 1 Easy
Learning Objective: 02-03 Explain how the market system decides what to produce; how to produce it; and who obtains it.
Topic: Five fundamental questions
45. Firms are motivated to minimize production costs because:
A. it is the most environmentally friendly way to produce goods.
B. least-cost production techniques use the smallest total quantity of resources.
C. competitive pressures in the market will drive out higher-cost producers.
D. the government provides tax credits and subsidies to low-cost producers.
AACSB: Analytic
Bloom’s: Level 2 Understand
Difficulty: 2 Medium
Learning Objective: 02-03 Explain how the market system decides what to produce; how to produce it; and who obtains it.
Status: New
Topic: Five fundamental questions
Answer the question using the following data which show all available techniques for
producing 20 units of a particular commodity:
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any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 02 – The Market System and the Circular Flow
46. Refer to the above data. In view of the indicated resource prices, the economically most
efficient production technique(s) is (are) technique(s):
A. #1.
B. #2 and #4.
C. #3.
D. #1 and #3.
AACSB: Analytic
Bloom’s: Level 4 Analyze
Difficulty: 3 Hard
Learning Objective: 02-03 Explain how the market system decides what to produce; how to produce it; and who obtains it.
Topic: Five fundamental questions
Type: Table
47. Refer to the above data. Assuming that the firm is motivated by self-interest and that the
20 units which can be produced with each technique can be sold for $2 per unit, the firm will:
A. realize an economic profit of $10.
B. realize an economic profit of $4.
C. not earn any economic profit.
D. shutdown rather than incur a loss by producing.
AACSB: Analytic
Bloom’s: Level 3 Apply
Difficulty: 2 Medium
Learning Objective: 02-03 Explain how the market system decides what to produce; how to produce it; and who obtains it.
Topic: Five fundamental questions
Type: Table
48. Refer to the above data. If a new production technique is developed that enables a firm to
produce 20 units of output with 3 units of land, 3 of labor, 1 of capital, and 2 of
entrepreneurial ability, this technique would:
A. not be adopted because, although it reduces production costs, it does not increase profit.
B. be adopted because it would lower production costs and increase economic profit.
C. not be adopted because it entails higher production costs than other available techniques.
D. be adopted, even though economic profits would be reduced slightly.
AACSB: Analytic
Bloom’s: Level 4 Analyze
Difficulty: 3 Hard
Learning Objective: 02-03 Explain how the market system decides what to produce; how to produce it; and who obtains it.
Topic: Five fundamental questions
Type: Table
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any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 02 – The Market System and the Circular Flow
Answer the question on the basis of the following information: Suppose 30 units of product
A can be produced by employing just labor and capital in the four ways shown below.
Assume the prices of labor and capital are $2 and $3 respectively.
49. Refer to the above information. Which technique is economically most efficient in
producing A?
A. I
B. II
C. III
D. IV
AACSB: Analytic
Bloom’s: Level 4 Analyze
Difficulty: 3 Hard
Learning Objective: 02-03 Explain how the market system decides what to produce; how to produce it; and who obtains it.
Topic: Five fundamental questions
Type: Table
50. Refer to the above information. If the price of product A is $0.50, the firm will realize:
A. an economic profit of $4.
B. an economic profit of $2.
C. an economic profit of $6.
D. a loss of $3.
AACSB: Analytic
Bloom’s: Level 3 Apply
Difficulty: 2 Medium
Learning Objective: 02-03 Explain how the market system decides what to produce; how to produce it; and who obtains it.
Topic: Five fundamental questions
Type: Table
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any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 02 – The Market System and the Circular Flow
51. In a competitive market economy firms select the least-cost production technique
because:
A. such choices will result in full employment of available resources.
B. to do so will maximize the firms’ profits.
C. this will prevent new firms from entering the industry.
D. “dollar voting” by consumers mandates such a choice.
AACSB: Reflective Thinking
Bloom’s: Level 2 Understand
Difficulty: 2 Medium
Learning Objective: 02-03 Explain how the market system decides what to produce; how to produce it; and who obtains it.
Topic: Five fundamental questions
52. The market system’s answer to the fundamental question “What will be produced?” is
essentially:
A. “Goods and services that are profitable.”
B. “Low cost goods and services.”
C. “Goods and service that can be produced using large amounts of capital.”
D. “Goods and services that possess lasting value.”
AACSB: Reflective Thinking
Bloom’s: Level 2 Understand
Difficulty: 2 Medium
Learning Objective: 02-03 Explain how the market system decides what to produce; how to produce it; and who obtains it.
Topic: Five fundamental questions
53. The market system’s answer to the fundamental question “How will the goods and
services be produced?” is essentially:
A. “With as much machinery as possible.”
B. “Using the latest technology.”
C. “By exploiting labor.”
D. “Using the least-cost production techniques.”
AACSB: Reflective Thinking
Bloom’s: Level 2 Understand
Difficulty: 2 Medium
Learning Objective: 02-03 Explain how the market system decides what to produce; how to produce it; and who obtains it.
Topic: Five fundamental questions
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any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 02 – The Market System and the Circular Flow
54. The market system’s answer to the fundamental question “Who will get the goods and
services?” is essentially:
A. “Those willing and able to pay for them.”
B. “Those who physically produced them.”
C. “Those who most need them.”
D. “Those who get utility from them.”
AACSB: Reflective Thinking
Bloom’s: Level 2 Understand
Difficulty: 2 Medium
Learning Objective: 02-03 Explain how the market system decides what to produce; how to produce it; and who obtains it.
Topic: Five fundamental questions
55. The market system’s answer to the fundamental question “How will the system
accommodate change?” is essentially:
A. “Through government leadership and direction.”
B. “Through the guiding function of prices and the incentive function of profits.”
C. “Through training and retraining programs.”
D. “Through trial and error.”
AACSB: Reflective Thinking
Bloom’s: Level 2 Understand
Difficulty: 2 Medium
Learning Objective: 02-04 Discuss how the market system adjusts to change and promotes progress.
Topic: Five fundamental questions
56. The market system’s answer to the fundamental question “How will the system promote
progress?” is essentially:
A. “Through government funded research programs.”
B. “Through redistribution of income to promote greater equality.”
C. “Through training and retraining programs.”
D. “Through the profit potential that encourages development of new technology.”
AACSB: Reflective Thinking
Bloom’s: Level 2 Understand
Difficulty: 2 Medium
Learning Objective: 02-04 Discuss how the market system adjusts to change and promotes progress.
Topic: Five fundamental questions
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any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 02 – The Market System and the Circular Flow
57. The advent of DVDs has virtually demolished the market for videocassettes. This is an
example of:
A. creative destruction.
B. derived demand.
C. capital accumulation.
D. the difference between normal and economic profits.
AACSB: Reflective Thinking
Bloom’s: Level 3 Apply
Difficulty: 2 Medium
Learning Objective: 02-04 Discuss how the market system adjusts to change and promotes progress.
Topic: Five fundamental questions
58. “Consumer sovereignty” refers to the:
A. fact that resource prices are higher than product prices in capitalistic economies.
B. idea that the pursuit of self-interest is in the public interest.
C. idea that the decisions of producers must ultimately conform to consumer demands.
D. fact that a Federal agency exists to protect consumers from harmful and defective products.
AACSB: Analytic
Bloom’s: Level 2 Understand
Difficulty: 2 Medium
Learning Objective: 02-03 Explain how the market system decides what to produce; how to produce it; and who obtains it.
Topic: Five fundamental questions
59. The dollar votes of consumers ultimately determine the composition of output and the
allocation of resources in a market economy. This statement best describes the concept of:
A. derived demand.
B. consumer sovereignty.
C. the invisible hand.
D. market failure.
AACSB: Analytic
Bloom’s: Level 1 Remember
Difficulty: 1 Easy
Learning Objective: 02-03 Explain how the market system decides what to produce; how to produce it; and who obtains it.
Topic: Five fundamental questions
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any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 02 – The Market System and the Circular Flow
60. Which of the following is not one of the five fundamental questions?
A. What prices will be charged for goods and services?
B. Who will get the goods and services?
C. What goods and services will be produced?
D. How will the system promote progress?
AACSB: Analytic
Bloom’s: Level 1 Remember
Difficulty: 1 Easy
Learning Objective: 02-03 Explain how the market system decides what to produce; how to produce it; and who obtains it.
Topic: Five fundamental questions
61. “Consumer sovereignty” means that:
A. buyers can dictate the prices at which goods and services will be purchased.
B. advertising is ineffective because consumers already know what they want.
C. buyers control the quality of goods and services through regulatory agencies.
D. buyers determine what will be produced based on their “dollar votes” for the goods and
services offered by sellers.
AACSB: Analytic
Bloom’s: Level 2 Understand
Difficulty: 2 Medium
Learning Objective: 02-03 Explain how the market system decides what to produce; how to produce it; and who obtains it.
Topic: Five fundamental questions
62. Which of the following best describes the invisible-hand concept?
A. The desires of resource suppliers and producers to further their own self-interest will
automatically further the public interest.
B. The non-substitutability of resources creates a conflict between private and public interests
and calls for government intervention.
C. The market system is the best system for overcoming the scarce resources-unlimited wants
problem.
D. Central direction by the government will improve resource allocation in a capitalistic
economy.
AACSB: Analytic
Bloom’s: Level 1 Remember
Difficulty: 1 Easy
Learning Objective: 02-03 Explain how the market system decides what to produce; how to produce it; and who obtains it.
Topic: Invisible hand
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any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 02 – The Market System and the Circular Flow
63. The invisible hand refers to the:
A. fact that the U.S. tax system redistributes income from rich to poor.
B. notion that, under competition, decisions motivated by self-interest promote the social
interest.
C. tendency of monopolistic sellers to raise prices above competitive levels.
D. fact that government controls the functioning of the market system.
AACSB: Analytic
Bloom’s: Level 2 Understand
Difficulty: 2 Medium
Learning Objective: 02-03 Explain how the market system decides what to produce; how to produce it; and who obtains it.
Topic: Invisible hand
64. The invisible hand concept suggests that:
A. market failures imply the need for a national economic plan.
B. big businesses are inherently more efficient than small businesses.
C. the competitiveness of a capitalistic market economy invariably diminishes over time.
D. assuming competition, private and public interests will coincide.
AACSB: Reflective Thinking
Bloom’s: Level 2 Understand
Difficulty: 2 Medium
Learning Objective: 02-03 Explain how the market system decides what to produce; how to produce it; and who obtains it.
Topic: Invisible hand
65. Two major virtues of the market system are that it:
A. allocates resources efficiently and allows economic freedom.
B. results in an equitable personal distribution of income and always maintains full
employment.
C. results in price level stability and a fair personal distribution of income.
D. eliminates discrimination and minimizes environmental pollution.
AACSB: Reflective Thinking
Bloom’s: Level 2 Understand
Difficulty: 2 Medium
Learning Objective: 02-03 Explain how the market system decides what to produce; how to produce it; and who obtains it.
Topic: Invisible hand
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any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 02 – The Market System and the Circular Flow
66. The market system:
A. produces considerable inefficiency in the use of scarce resources.
B. effectively harnesses the incentives of workers and entrepreneurs.
C. is not consistent with freedom of choice in the long run.
D. has slowly lost ground to emerging command systems.
AACSB: Reflective Thinking
Bloom’s: Level 2 Understand
Difficulty: 2 Medium
Learning Objective: 02-03 Explain how the market system decides what to produce; how to produce it; and who obtains it.
Topic: Invisible hand
67. According to the concept of the “invisible hand,” if Susie opens and operates a profitable
childcare center, then:
A. government should regulate the business to ensure quality.
B. the profit Susie earns indicates that she is overcharging for her services.
C. she has served society’s interests by providing a desired good or service.
D. this demonstrates that consumer sovereignty is not present in this market.
AACSB: Reflective Thinking
Bloom’s: Level 3 Apply
Difficulty: 2 Medium
Learning Objective: 02-03 Explain how the market system decides what to produce; how to produce it; and who obtains it.
Topic: Invisible hand
68. The invisible hand promotes society’s interests because:
A. individuals pursuing their self-interest will try to produce goods and services that people in
society want and are willing to purchase.
B. individuals will produce goods for others out of concern for their fellow human beings.
C. it makes sure that everyone wins from competition in the market.
D. government regulation pushes business into producing the right mix of goods and services.
AACSB: Reflective Thinking
Bloom’s: Level 2 Understand
Difficulty: 2 Medium
Learning Objective: 02-03 Explain how the market system decides what to produce; how to produce it; and who obtains it.
Topic: Invisible hand
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any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 02 – The Market System and the Circular Flow
69. The coordination problem in the centrally planned economies refers to the idea that:
A. planners had to direct required inputs to each enterprise.
B. the price level and the level of employment were inversely related.
C. the immediate effect of more investment was less consumption.
D. exports had to be equal to imports for a central plan to work.
AACSB: Analytic
Bloom’s: Level 2 Understand
Difficulty: 2 Medium
Learning Objective: 02-01 Differentiate between a command system and a market system.
Topic: Demise of the command systems
70. “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:
A. incentive problem under central planning.
B. coordination problem under central planning.
C. self-sufficiency dilemma under communism.
D. resource over-commitment problem under communism.
AACSB: Reflective Thinking
Bloom’s: Level 3 Apply
Difficulty: 2 Medium
Learning Objective: 02-01 Differentiate between a command system and a market system.
Topic: Demise of the command systems
71. “Because the outputs of many industries are the inputs to other industries, the failure of
any single industry to fulfill the output quantities specified in the central plan caused a chainreaction of adverse repercussions on production.” This quotation best identifies the:
A. incentive problem under central planning.
B. self-sufficiency dilemma under communism.
C. resource over-commitment problem under communism.
D. coordination problem under central planning.
AACSB: Reflective Thinking
Bloom’s: Level 3 Apply
Difficulty: 2 Medium
Learning Objective: 02-01 Differentiate between a command system and a market system.
Topic: Demise of the command systems
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any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 02 – The Market System and the Circular Flow
72. The incentive problem under communist central planning refers to the idea that:
A. planners had to direct required inputs to each enterprise.
B. workers, managers, and entrepreneurs could not personally gain by responding to shortages
or surpluses or by introducing new and improved products.
C. the immediate effect of more investment was less consumption.
D. exports had to be equal to imports for a central plan to work.
AACSB: Reflective Thinking
Bloom’s: Level 2 Understand
Difficulty: 2 Medium
Learning Objective: 02-01 Differentiate between a command system and a market system.
Topic: Demise of the command systems
73. Suppose that an individual sees a tremendous opportunity to produce and sell a new
product, but dismisses the idea because there is no way to exploit this opportunity for personal
gain. This situation best identifies the:
A. coordination problem under communist central planning.
B. self-sufficiency dilemma under communism.
C. asymmetric information problem under communism.
D. incentive problem under communist central planning.
AACSB: Reflective Thinking
Bloom’s: Level 3 Apply
Difficulty: 2 Medium
Learning Objective: 02-01 Differentiate between a command system and a market system.
Topic: Demise of the command systems
74. Innovation lagged in the centrally planned economies because:
A. there was too much domestic business competition.
B. there was too much competition from foreign firms.
C. enterprises resisted innovation in fear that their production targets would be raised.
D. exports had to equal imports for the plan to work.
AACSB: Reflective Thinking
Bloom’s: Level 2 Understand
Difficulty: 2 Medium
Learning Objective: 02-01 Differentiate between a command system and a market system.
Topic: Demise of the command systems
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any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 02 – The Market System and the Circular Flow
75. The fact that the major indicator of enterprise success in the Soviet Union and pre-reform
China was the quantity of output implied that:
A. product quality was neglected.
B. production costs were minimized.
C. product-mix met consumer needs.
D. technological advance was too rapid.
AACSB: Reflective Thinking
Bloom’s: Level 4 Analyze
Difficulty: 3 Hard
Learning Objective: 02-01 Differentiate between a command system and a market system.
Topic: Demise of the command systems
76. Enterprise managers and workers in the Soviet Union often resisted innovations in
production methods because:
A. production targets were often increased when innovation occurred.
B. there was a chronic shortage of computers.
C. workers could not be reallocated geographically.
D. innovations ordinarily increased dependence on world markets.
AACSB: Reflective Thinking
Bloom’s: Level 1 Remember
Difficulty: 1 Easy
Learning Objective: 02-01 Differentiate between a command system and a market system.
Topic: Demise of the command systems
77. If products were in short or surplus supply in the Soviet Union:
A. price and profit signals eliminated those shortages and surpluses.
B. price and profit signals intensified those shortages and surpluses.
C. producers would not react because no price or profit signals occurred.
D. the planners would immediately adjust production to achieve equilibrium.
AACSB: Reflective Thinking
Bloom’s: Level 1 Remember
Difficulty: 1 Easy
Learning Objective: 02-01 Differentiate between a command system and a market system.
Topic: Demise of the command systems
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any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 02 – The Market System and the Circular Flow
78. In what type of business do the owners bear no personal financial responsibility for the
company’s debts and obligations?
A. Partnerships.
B. Corporations.
C. Sole proprietorships.
D. In all of the businesses listed in the other answers.
AACSB: Analytic
Bloom’s: Level 1 Remember
Difficulty: 1 Easy
Learning Objective: 02-05 Describe the mechanics of the circular flow model.
Status: New
Topic: Circular flow model
79. The simple circular flow model shows that:
A. households are on the buying side of both product and resource markets.
B. businesses are on the selling side of both product and resource markets.
C. households are on the selling side of the resource market and on the buying side of the
product market.
D. businesses are on the buying side of the product market and on the selling side of the
resource market.
AACSB: Analytic
Bloom’s: Level 1 Remember
Difficulty: 1 Easy
Learning Objective: 02-05 Describe the mechanics of the circular flow model.
Topic: Circular flow model
80. The two basic markets shown by the simple circular flow model are:
A. capital goods and consumer goods.
B. free and controlled.
C. product and resource.
D. household and business.
AACSB: Analytic
Bloom’s: Level 1 Remember
Difficulty: 1 Easy
Learning Objective: 02-05 Describe the mechanics of the circular flow model.
Topic: Circular flow model
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any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 02 – The Market System and the Circular Flow
81. In the resource market:
A. businesses borrow financial capital from households.
B. businesses sell services to households.
C. households sell resources to businesses.
D. firms sell raw materials to households.
AACSB: Analytic
Bloom’s: Level 1 Remember
Difficulty: 1 Easy
Learning Objective: 02-05 Describe the mechanics of the circular flow model.
Topic: Circular flow model
82. In the simple circular flow model:
A. households are buyers of resources.
B. businesses are sellers of final products.
C. households are sellers of final products.
D. there are real flows of goods, services, and resources, but not money flows.
AACSB: Analytic
Bloom’s: Level 1 Remember
Difficulty: 1 Easy
Learning Objective: 02-05 Describe the mechanics of the circular flow model.
Topic: Circular flow model
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any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 02 – The Market System and the Circular Flow
83. Refer to the above diagram. Flow (1) represents:
A. wage, rent, interest, and profit income.
B. land, labor, capital, and entrepreneurial ability.
C. goods and services.
D. consumer expenditures.
AACSB: Analytic
Bloom’s: Level 2 Understand
Difficulty: 2 Medium
Learning Objective: 02-05 Describe the mechanics of the circular flow model.
Topic: Circular flow model
Type: Figure
84. Refer to the above diagram. Flow (2) represents:
A. wage, rent, interest, and profit income.
B. land, labor, capital, and entrepreneurial ability.
C. goods and services.
D. consumer expenditures.
AACSB: Analytic
Bloom’s: Level 2 Understand
Difficulty: 2 Medium
Learning Objective: 02-05 Describe the mechanics of the circular flow model.
Topic: Circular flow model
Type: Figure
85. Refer to the above diagram. Flow (3) represents:
A. wage, rent, interest, and profit income.
B. land, labor, capital, and entrepreneurial ability.
C. goods and services.
D. consumer expenditures.
AACSB: Analytic
Bloom’s: Level 2 Understand
Difficulty: 2 Medium
Learning Objective: 02-05 Describe the mechanics of the circular flow model.
Topic: Circular flow model
Type: Figure
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any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 02 – The Market System and the Circular Flow
86. Refer to the above diagram. Flow (4) represents:
A. wage, rent, interest, and profit income.
B. land, labor, capital, and entrepreneurial ability.
C. goods and services.
D. consumer expenditures.
AACSB: Analytic
Bloom’s: Level 2 Understand
Difficulty: 2 Medium
Learning Objective: 02-05 Describe the mechanics of the circular flow model.
Topic: Circular flow model
Type: Figure
87. In terms of the circular flow diagram, households make expenditures in the _____ market
and receive income through the _____ market.
A. product; financial
B. resource; product
C. product; resource
D. capital; product
AACSB: Analytic
Bloom’s: Level 1 Remember
Difficulty: 1 Easy
Learning Objective: 02-05 Describe the mechanics of the circular flow model.
Topic: Circular flow model
88. In terms of the circular flow diagram, businesses obtain revenue through the _____ market
and make expenditures in the _____ market.
A. product; financial
B. resource; product
C. product; resource
D. capital; product
AACSB: Analytic
Bloom’s: Level 1 Remember
Difficulty: 1 Easy
Learning Objective: 02-05 Describe the mechanics of the circular flow model.
Topic: Circular flow model
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any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 02 – The Market System and the Circular Flow
89. Households and businesses are:
A. both buyers in the resource market.
B. both sellers in the product market.
C. sellers in the resource and product markets respectively.
D. sellers in the product and resource markets respectively.
AACSB: Analytic
Bloom’s: Level 1 Remember
Difficulty: 1 Easy
Learning Objective: 02-05 Describe the mechanics of the circular flow model.
Topic: Circular flow model
90. Refer to the above diagram. Arrows (1) and (2) represent:
A. goods and resources respectively.
B. money incomes and output respectively.
C. output and money incomes respectively.
D. resources and goods respectively.
AACSB: Analytic
Bloom’s: Level 1 Remember
Difficulty: 1 Easy
Learning Objective: 02-05 Describe the mechanics of the circular flow model.
Topic: Circular flow model
Type: Figure
2-57
ยฉ 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 02 – The Market System and the Circular Flow
91. Refer to the above diagram. Arrows (3) and (4) represent:
A. goods and services respectively.
B. incomes and consumer expenditures respectively.
C. resources and goods respectively.
D. consumer expenditures and income respectively.
AACSB: Analytic
Bloom’s: Level 1 Remember
Difficulty: 1 Easy
Learning Objective: 02-05 Describe the mechanics of the circular flow model.
Topic: Circular flow model
Type: Figure
92. Refer to the above diagram. Arrows (1) and (3) are associated with:
A. the money market.
B. the resource market.
C. the product market.
D. international trade.
AACSB: Analytic
Bloom’s: Level 1 Remember
Difficulty: 1 Easy
Learning Objective: 02-05 Describe the mechanics of the circular flow model.
Topic: Circular flow model
Type: Figure
93. Which of the following best illustrates the circular flow model in action?
A. Bobbie goes to work and builds cars, and uses the income she receives to buy food at the
grocery store.
B. Evan buys a new couch; the owner of the furniture store uses some of the money from the
sale to pay her supplier, and uses the rest to take her family out to dinner.
C. Boeing experiences a surge in orders for new airplanes, prompting the company to hire
more workers.
D. All of these answers illustrate the workings of the circular flow model.
AACSB: Reflective Thinking
Bloom’s: Level 3 Apply
Difficulty: 2 Medium
Learning Objective: 02-05 Describe the mechanics of the circular flow model.
Topic: Circular flow model
2-58
ยฉ 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 02 – The Market System and the Circular Flow
94. (Consider This) In 1975, McDonald’s introduced its Egg McMuffin breakfast sandwich,
which remains popular and profitable today. This longevity illustrates the idea of:
A. opportunity cost.
B. upsloping supply.
C. consumer sovereignty.
D. specialization.
AACSB: Reflective Thinking
Bloom’s: Level 3 Apply
Difficulty: 2 Medium
Learning Objective: 02-03 Explain how the market system decides what to produce; how to produce it; and who obtains it.
Topic: Five fundamental questions
95. (Consider This) 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:
A. consumer sovereignty.
B. technological change.
C. downsloping demand.
D. specialization.
AACSB: Reflective Thinking
Bloom’s: Level 3 Apply
Difficulty: 2 Medium
Learning Objective: 02-03 Explain how the market system decides what to produce; how to produce it; and who obtains it.
Status: New
Topic: Five fundamental questions
2-59
ยฉ 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 02 – The Market System and the Circular Flow
96. (Consider This) Since World War II:
A. North Korea’s command economy has significantly outperformed South Korea’s market
economy.
B. South Korea’s command economy has significantly outperformed North Korea’s market
economy.
C. North Korea’s market economy has significantly outperformed South Korea’s command
economy.
D. South Korea’s market economy has significantly outperformed North Korea’s command
economy.
AACSB: Analytic
Bloom’s: Level 1 Remember
Difficulty: 1 Easy
Learning Objective: 02-01 Differentiate between a command system and a market system.
Topic: Demise of the command systems
97. (Consider This) North Korea’s command economy:
A. is one of the few remaining command economies.
B. has grown much faster than South Korea since the two countries were divided after World
War II.
C. produces a per capita GDP of nearly $25,000.
D. has undergone significant market reforms and is now one of the fastest growing
economies.
AACSB: Analytic
Bloom’s: Level 1 Remember
Difficulty: 1 Easy
Learning Objective: 02-01 Differentiate between a command system and a market system.
Topic: Demise of the command systems
2-60
ยฉ 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 02 – The Market System and the Circular Flow
98. (Last Word) According to economist Donald Boudreaux, the world’s tens of billions of
individual resources get arranged productively:
A. because government has become highly effective at central planning.
B. because private property encourages people to consider the alternative uses of their
resources and select those that provide the most rewards.
C. because people tend to be creative and orderly.
D. through random trial and error.
AACSB: Analytic
Bloom’s: Level 2 Understand
Difficulty: 2 Medium
Learning Objective: 02-02 List the main characteristics of the market system.
Topic: Characteristics of the market system
99. (Last Word) According to economist Donald Boudreaux:
A. private property eliminates the possibility that resource arrangements will be random.
B. the market system threatens to do irreparable harm to the world’s ecosystem.
C. arranging resources under the market system is much like shuffling a deck of cards.
D. the market system works wondrously for advanced industrial nations but not for
developing nations.
AACSB: Analytic
Bloom’s: Level 2 Understand
Difficulty: 2 Medium
Learning Objective: 02-02 List the main characteristics of the market system.
Topic: Characteristics of the market system
True / False Questions
100. Market economies use capital goods because they improve productive efficiency.
TRUE
AACSB: Analytic
Bloom’s: Level 2 Understand
Difficulty: 2 Medium
Learning Objective: 02-02 List the main characteristics of the market system.
Topic: Characteristics of the market system
2-61
ยฉ 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 02 – The Market System and the Circular Flow
101. Money functions as a medium of exchange by eliminating the need for a coincidence of
wants.
TRUE
AACSB: Analytic
Bloom’s: Level 2 Understand
Difficulty: 2 Medium
Learning Objective: 02-02 List the main characteristics of the market system.
Topic: Characteristics of the market system
102. Consumer sovereignty means that legislation now protects the rights of consumers to
dispose of their incomes as they see fit.
FALSE
AACSB: Analytic
Bloom’s: Level 1 Remember
Difficulty: 1 Easy
Learning Objective: 02-03 Explain how the market system decides what to produce; how to produce it; and who obtains it.
Topic: Five fundamental questions
103. Specialization may expand total output even though the individuals involved may have
identical abilities.
TRUE
AACSB: Analytic
Bloom’s: Level 2 Understand
Difficulty: 2 Medium
Learning Objective: 02-02 List the main characteristics of the market system.
Topic: Characteristics of the market system
104. The wants of consumers are expressed in the product market with “dollar votes.”
TRUE
AACSB: Analytic
Bloom’s: Level 1 Remember
Difficulty: 1 Easy
Learning Objective: 02-03 Explain how the market system decides what to produce; how to produce it; and who obtains it.
Topic: Five fundamental questions
2-62
ยฉ 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 02 – The Market System and the Circular Flow
105. Costs can be defined as total payments made to workers, land owners, and capital
suppliers less payments to the entrepreneur for organizing and combining the other resources
used to produce a good.
FALSE
AACSB: Analytic
Bloom’s: Level 1 Remember
Difficulty: 1 Easy
Learning Objective: 02-03 Explain how the market system decides what to produce; how to produce it; and who obtains it.
Topic: Five fundamental questions
106. Continued losses in an industry will cause some firms to reduce output or eventually
leave the industry.
TRUE
AACSB: Analytic
Bloom’s: Level 2 Understand
Difficulty: 2 Medium
Learning Objective: 02-03 Explain how the market system decides what to produce; how to produce it; and who obtains it.
Topic: Five fundamental questions
107. The guiding function of prices tends to keep resources flowing toward their most highly
valued uses.
TRUE
AACSB: Analytic
Bloom’s: Level 2 Understand
Difficulty: 2 Medium
Learning Objective: 02-04 Discuss how the market system adjusts to change and promotes progress.
Topic: Five fundamental questions
108. The invisible hand refers to the many indirect controls that the Federal government
imposes in a market system.
FALSE
AACSB: Analytic
Bloom’s: Level 2 Understand
Difficulty: 2 Medium
Learning Objective: 02-04 Discuss how the market system adjusts to change and promotes progress.
Topic: Invisible hand
2-63
ยฉ 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 02 – The Market System and the Circular Flow
109. Central planning in the Soviet Union and pre-reform China emphasized the expansion of
the production of consumer goods to raise the domestic standard of living.
FALSE
AACSB: Reflective Thinking
Bloom’s: Level 1 Remember
Difficulty: 1 Easy
Learning Objective: 02-01 Differentiate between a command system and a market system.
Topic: Demise of the command systems
110. Central planning often suffers from a coordination problem and an incentive problem.
TRUE
AACSB: Reflective Thinking
Bloom’s: Level 1 Remember
Difficulty: 1 Easy
Learning Objective: 02-01 Differentiate between a command system and a market system.
Topic: Demise of the command systems
2-64
ยฉ 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
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