Chapter 02 - The Market System and the Circular Flow

Chapter 02 The Market System and the Circular Flow
Multiple Choice Questions

1. The two general types of economic systems that exist today are: A. market systems and capitalism. B. socialism and central planning. C. market systems and command systems. D. laissez faire systems and pure command systems.

2. 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.

3. 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.

4. Examples of command economies are: A. The United States and Japan. B. Sweden and Norway. C. Mexico and Brazil. D. Cuba and North Korea.

5. Of the following countries, the one that best exhibits the characteristics of a market economy is: A. Canada. B. Cuba. C. North Korea. D. China.

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Chapter 02 - The Market System and the Circular Flow

6. The French term "laissez-faire" means: A. "there is no free lunch." B. "let it be." C. "circular flow." D. "public ownership."

7. 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.

8. 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 equipment 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.

9. Economic scarcity: A. is peculiar to the United States economy. B. applies to all economies. C. is peculiar to command systems. D. is peculiar to market systems.

10. Economic systems differ according to what 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

11. Command systems are also known as: A. market systems. B. pure capitalism. C. laissez-faire capitalism. D. communism.

12. 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, as it does in a market system. D. money is not used, whereas it is in a market system.

13. Which of the following is not a characteristic of the market system? A. private property. B. freedom of enterprise. C. government ownership of the major industries. D. competition in product and resource markets.

14. 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.

15. Copyrights and trademarks are examples of: A. capital goods. B. human capital. C. property rights. D. public goods.

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C. B. 18. gives direction to the market system. Well-defined property rights: A. private property and freedom of expression. but not in the behavior of consumers. Broadly defined. competition. is reflected in the behavior of firms. sellers can manipulate market price by causing product scarcities. D. C. B. D. increasing opportunity costs and diminishing marginal utility. encourage owners to maintain or improve their property. The pursuit of self-interest: A. discourage investment and growth. is highly detrimental to the market system. C. there are independently-acting buyers and sellers in each market. private property.Chapter 02 . D. capital goods and division of labor. D. discourage hard work.The Market System and the Circular Flow 16. 19. Competition means that: A. there is more than one seller in a market. a product can be purchased at a number of different prices. B. B. D. 2-4 . B. competition involves: A. independently acting buyers and sellers and freedom to enter or leave markets. impede exchange. self-interest. C. specialization." C. 20. 17. The regulatory mechanism of the market system is: A. means the same as "selfishness.

results in greater total output. Specialization in production is important primarily because it: A. C. each worker performs a large number of tasks. B. guarantees full employment. D. 22. 24. 23. all of the means identified in the other answers. Specialization–the division of labor–enhances productivity and efficiency by: A. allows society to trade by barter. avoiding the time loss involved in shifting from one production task to another. allowing workers to develop skills by working on one. allows everyone to have a job which they like. B. allows society to avoid the coincidence-of-wants problem. B. C. permits the production of a larger output with fixed amounts of resources. facilitates trade by bartering. or a limited number. D. workers specialize in various production tasks.The Market System and the Circular Flow 21.Chapter 02 . C. allows society to have fewer capital goods. 2-5 . labor markets are geographically segmented. D. Specialization in production is economically beneficial primarily because it: A. B. C. of tasks. unskilled workers outnumber skilled workers. allowing workers to take advantage of existing differences in their abilities and skills. The division of labor means that: A. D.

that money will not be needed to accomplish the desired exchanges. B. Washington to exchange apples with Michigan and receive money in return. C.Chapter 02 . B. entails the exchange of goods for goods. a coincidence of wants exists between Texas and Washington. Texas to trade lettuce directly for Washington apples. 29. C.The Market System and the Circular Flow 25. 27. specialization is restricted by the size or scope of a market. 2-6 . money to flow counterclockwise from Michigan to Texas to Washington. that there is no means by which Michigan can obtain lettuce while specializing in the production of autos. D. C. is the major means of exchange in centrally planned economies. B. C. C. money must be used as a medium of exchange or trade will never occur. On the basis of the above information and assuming trade occurs between the three states we can expect: A. a coincidence of wants exists between Michigan and Washington. for exchange to occur each seller must have a product that some buyer wants. D. Given 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. D. The coincidence-of-wants problem associated with barter refers to the fact that: A. 28. is used to circumvent the problem of a lack of coincidence of wants among potential buyers and sellers. Barter: A. accounts for over 30 percent of the dollar volume of all exchange in the U. D. D. B. economy. money to flow clockwise from Michigan to Washington to Texas. buyers in resource markets and sellers in product markets can never engage in exchange. Texas to exchange lettuce with Michigan and receive autos in return. a coincidence of wants exists between Michigan and Texas. no coincidence of wants exists between any two states.S. On the basis of the above information it can be said that: A. 26. B.

Chapter 02 - The Market System and the Circular Flow

30. 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.

31. 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.

32. 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

33. 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 the society save? D. What goods and services will be produced?

34. Which of the following is not an economic cost? A. wages. B. rents. C. economic profits. D. payments made to the entrepreneur for organizing production.

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Chapter 02 - The Market System and the Circular Flow

35. 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.

36. 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.

37. In a market economy a significant change in consumers' desire for product X will: A. alter the profits or losses received by certain firms. B. cause a reallocation of scarce resources. C. cause some industries to expand and others to contract. D. do all of these.

38. 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.

39. 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 goods to more desired goods. C. have no influence on the composition of the domestic output. D. equalize the distribution of income in the long run.

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Chapter 02 - The Market System and the Circular Flow

40. 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.

41. 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.

42. 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.

43. 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.

44. In a competitive economy, prices: A. influence consumers in their purchases of goods and services. B. influence businesses in their purchases of economic resources. C. influence workers in making occupational choices. D. do all of these.

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we would expect: A. discourages innovation because it is difficult to acquire additional capital in the form of new machinery and equipment. B. C. 48.Chapter 02 . 46. and entrepreneurial ability. total revenue to be zero. The most efficient combination of resources in producing any output is the combination that: A. uses the smallest total quantity of all resources. total opportunity cost to be zero. discourages innovation because firms want to get all the profits possible from existing machinery and equipment. D. Suppose industry A is realizing substantial economic profit. D. more resources to flow to that industry. In a market economy the distribution of output will be determined primarily by: A. B. C. C. encourages innovation because government provides tax breaks and subsidies to those who develop new products or new productive techniques. B. Firms will enter the industry and output will fall. If a competitive industry is neither expanding nor contracting. economic profits to be zero. Which of the following best describes what will happen in this competitive market? A. Firms will enter the industry and output will rise. 49. D. 2-10 . C. a social consensus as to what distribution of income is most equitable. Firms will leave the industry and output will rise. B. comes closest to using the same quantities of land. D. The competitive market system: A.The Market System and the Circular Flow 45. the quantities and prices of the resources that households supply. Firms will leave the industry and output will fall. capital. labor. D. government regulations that provide a minimum income for all. conserves most on the use of labor. consumer needs and preferences. 47. C. can be obtained for the smallest money outlay. encourages innovation because successful innovators are rewarded with economic profits. B.

Refer to the above data. Refer to the above data. be adopted because it would lower production costs and increase economic profit. If a new production technique is developed that enables a firm to produce 20 units of output with 3 units of land. 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. B. C. even though economic profits would be reduced slightly. In view of the indicated resource prices. not be adopted because it entails higher production costs than other available techniques. #1. #2 and #4. and 2 of entrepreneurial ability. D. B. 2-11 . D. 3 of labor. #1 and #3. it does not increase profit. close down rather than incur a loss by producing. not earn any economic profit. D. although it reduces production costs. the economically most efficient production technique(s) is (are) technique(s): A. B. realize an economic profit of $10.The Market System and the Circular Flow Answer the next question(s) using the following data which show all available techniques for producing 20 units of a particular commodity: 50. realize an economic profit of $4. 1 of capital.Chapter 02 . 51. C. be adopted. Refer to the above data. 52. C. this technique would: A. not be adopted because. the firm will: A. #3.

Which technique is economically most efficient in producing A? A. I B. D. 55. to do so will maximize the firms' profits. II C. Refer to the above information. Assume the prices of labor and capital are $2 and $3 respectively.Chapter 02 . B. In a competitive market economy firms will select the least-cost production technique because: A. an economic profit of $4. this will prevent new firms from entering the industry. a loss of $3. Refer to the above information. III D. C. an economic profit of $6. 2-12 . B.The Market System and the Circular Flow Answer the next question(s) 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. D. If the price of product A is $0. such choices will result in the full employment of available resources. "dollar voting" by consumers mandates such a choice. an economic profit of $2. 53.50. IV 54. the firm will realize: A. C.

Chapter 02 . "Through the guiding function of prices and the incentive function of profits." C. "Those willing and able to pay for them." B." C. "Through random trial and error." B." D. The market system's answer to the fundamental question "How will the system promote progress?" is essentially: A. "Through training and retraining programs. "Through government leadership and direction. "Goods and services that are profitable. "Those who physically produced them. The market system's answer to the fundamental question "Who will get the goods and services?" is essentially: A. "Through the profit potential that encourages development of new technology." 60." C." 57. "Those who get utility from them. "Using the latest technology." B. The market system's answer to the fundamental question "How will the system accommodate change?" is essentially: A." B. "With as much machinery as possible. "Through government funded research programs. The market system's answer to the fundamental question "What will be produced?" is essentially: A." D. The market system's answer to the fundamental question "How will the goods and services be produced?" is essentially: A.The Market System and the Circular Flow 56." 58. "Through the redistribution of income to promote greater equality." D." C." C. "Goods and services that possess lasting value. "Goods and service that can be produced using large amounts of capital. "Low cost goods and services." B. "Those who most need them. "Using the least-cost production techniques." 59. "By exploiting labor. "Through training and retraining programs." 2-13 ." D." D.

D. derived demand. 64. This statement best describes the concept of: A. C. buyers control the quality of goods and services through regulatory agencies. derived demand. D. Consumer sovereignty refers to the: A. What goods and services will be produced? D.. fact that resource prices are higher than product prices in capitalistic economies. C. The advent of DVDs has virtually demolished the market for videocassettes. The dollar votes of consumers ultimately determine the composition of output and the allocation of resources in a market economy. market failure. "Consumer sovereignty" means that: A. idea that the decisions of producers must ultimately conform to consumer demands. How will the system promote progress? 65. capital accumulation. B. D. 63. buyers determine what will be produced based on their "dollar votes" for the goods and services offered by sellers. creative destruction. What prices will be charged for goods and services? B. fact that a Federal agency exists to protect consumers from harmful and defective products. Who will get the goods and services? C. buyers can dictate the prices at which goods and services will be purchased.The Market System and the Circular Flow 61. This is an example of: A. idea that the pursuit of self-interest is in the public interest. the difference between normal and economic profits. 2-14 . 62. B. D. C. the invisible hand. C. Which of the following is not one of the five fundamental questions? A. B. consumer sovereignty.Chapter 02 . advertising is ineffective because consumers already know what they want. B.

fact that the U. B. The invisible-hand concept suggests that: A. D. under competition. 67. fact that government controls the functioning of the market system. tendency of monopolistic sellers to raise prices above competitive levels. private and public interests will coincide. B. society's output will also be maximized. Central direction by the government will improve resource allocation in a capitalistic economy. big businesses are inherently more efficient than small businesses. decisions motivated by self-interest promote the social interest. changes in product demands are only randomly reflected in changes in the demands for resources. The market system is the best system for overcoming the scarce resources-unlimited wants problem. C. 2-15 . D. C. C. 69. government action is necessary to correct for market failures. The invisible-hand concept suggests that: A. assuming competition. D. C. profit maximization is inconsistent with an efficient allocation of resources. The nonsubstitutability of resources creates a conflict between private and public interests and calls for government intervention. The desires of resource suppliers and producers to further their own self-interest will automatically further the public interest. the competitiveness of a capitalistic market economy invariably diminishes over time. when firms maximize their profits. notion that. Which of the following best describes the invisible-hand concept? A. tax system redistributes income from rich to poor.The Market System and the Circular Flow 66. B.Chapter 02 . market failures imply the need for a national economic plan. B. D.S. The invisible hand refers to the: A. 68.

effectively harnesses the incentives of workers and entrepreneurs. results in price level stability and a fair personal distribution of income." if Susie opens and operates a profitable childcare center. 2-16 .The Market System and the Circular Flow 70. has slowly lost ground to emerging command systems. Two major virtues of the market system are that it: A. The market system: A. then: A. D. B. C. C. B. D. D. results in an equitable personal distribution of income and always maintains full employment.Chapter 02 . the profit Susie earns indicates that she is overcharging for her services. government regulation pushes business into producing the right mix of goods and services. B. exports had to be equal to imports for a central plan to work. The coordination problem in the centrally planned economies refers to the idea that: A. planners had to direct required inputs to each enterprise. B. C. 74. the price level and the level of employment were inversely related. the immediate effect of more investment was less consumption. individuals will produce goods for others out of concern for their fellow human beings. C. government should regulate the business to ensure quality. is inconsistent with freedom of choice in the long run. individuals pursuing their self-interest will try to produce goods and services that people in society want and are willing to purchase. D. 71. eliminates discrimination and minimizes environmental pollution. C. this demonstrates that consumer sovereignty is not present in this market. it makes sure that everyone wins from competition in the market. The invisible hand promotes society's interests because: A. D. 73. According to the concept of the "invisible hand. she has served society's interests by providing a desired good or service. B. produces considerable inefficiency in the use of scarce resources. 72. allocates resources efficiently and allows economic freedom.

B. "Under central planning. 2-17 . coordination problem under central planning. managers. planners had to direct required inputs to each enterprise. D. This situation best identifies the: A. C. resource overcommitment problem under communism.Chapter 02 . self-sufficiency dilemma under communism." This quotation best identifies the: A. 76. incentive problem under communist central planning. B. C. B. coordination problem under communist central planning. resource overcommitment problem under communism." This quotation best identifies the: A. incentive problem under central planning. 77. C. the immediate effect of more investment was less consumption.The Market System and the Circular Flow 75. and entrepreneurs could not personally gain by responding to shortages or surpluses or by introducing new and improved products. workers. This is a nearly impossible task without markets and profits. D. Suppose that an individual sees a tremendous opportunity to produce and sell a new product. asymmetric information problem under communism. coordination problem under central planning. D. self-sufficiency dilemma under communism. B. C. self-sufficiency dilemma under communism. 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. D. "Because the outputs of many industries are the inputs to other industries. incentive problem under central planning. but dismisses the idea because there is no way to exploit this opportunity for personal gain. the failure of any single industry to fulfill the output quantities specified in the central plan caused a chainreaction of adverse repercussions on production. exports had to be equal to imports for a central plan to work. The incentive problem under communist central planning refers to the idea that: A. 78.

The failure of Soviet central planning was reflected in: A. B. product quality was neglected. C. there was a chronic shortage of computers. product-mix met consumer needs. production targets were often increased when innovation occurred. innovations ordinarily increased dependence on world markets. D. C. This reality represents central planning's: A. workers could not be reallocated geographically.Chapter 02 . Enterprise managers and workers in the Soviet Union often resisted innovations in production methods because: A. B. 83. incentive problem. C. Innovation lagged in the centrally planned economies because: A. D. X-efficiency problem. 81. technological advance was too rapid. B. D. but they present no such opportunities under central planning. C. enterprises resisted innovation in fear that their production targets would be raised. there was too much domestic business competition. Shortages and unmet demand provide opportunities for individuals and firms to profit under capitalism. poor quality goods. exports had to equal imports for the plan to work. C. paradox of value. production costs were minimized. the failure to provide promised consumer goods. B. 80. 2-18 . coordination problem.The Market System and the Circular Flow 79. 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. all of these. a declining growth rate. 82. B. D. D. there was too much competition from foreign firms.

product markets are ignored. C. B. C. 85. price and profit signals intensified those shortages and surpluses. resource markets are ignored. but not businesses. 86. 88. producers would not react because no price or profit signals occurred. the determination of product and resource prices is not explained. D. D. B. B. The two basic markets shown by the simple circular flow model are: A. households are included. 87. household and business. firms sell raw materials to households. free and controlled. D. B. D. C. businesses sell services to households.The Market System and the Circular Flow 84. B. businesses are on the buying side of the product market and on the selling side of the resource market. households sell resources to businesses. 2-19 . households are on the selling side of the resource market and on the buying side of the product market. capital goods and consumer goods. Which of the following is a limitation of the simple circular flow model? A. D. businesses are on the selling side of both product and resource markets. C. businesses borrow financial capital from households. If products were in short or surplus supply in the Soviet Union: A. price and profit signals eliminated those shortages and surpluses. C.Chapter 02 . the planners would immediately adjust production to achieve equilibrium. The simple circular flow model shows that: A. In the resource market: A. product and resource. households are on the buying side of both product and resource markets.

D. Refer to the above diagram. labor. In the simple circular flow model: A. consumer expenditures. and profit income. wage. C. interest. and profit income. 2-20 . land. and resources. 91.The Market System and the Circular Flow 89. D. 92. consumer expenditures.Chapter 02 . rent. households are sellers of final products. D. rent. goods and services. consumer expenditures. land. Flow (3) represents: A. and profit income. Refer to the above diagram. B. B. goods and services. labor. and entrepreneurial ability. capital. 90. Refer to the above diagram. Flow (2) represents: A. C. C. interest. there are real flows of goods. wage. capital. households are buyers of resources. services. but not money flows. and entrepreneurial ability. wage. B. businesses are sellers of final products. and entrepreneurial ability. B. C. interest. goods and services. Flow (1) represents: A. labor. D. capital. land. rent.

product C. interest. labor. financial B. goods and services. Households and businesses are: A. D. land. and profit income. consumer expenditures. In terms of the circular flow diagram. A. C. households spend income in the resource market. product. C. resource. and entrepreneurial ability. 2-21 . households sell resources to firms. product C. resource D. households make expenditures in the _____ market and receive income through the _____ market. businesses obtain revenue through the _____ market and make expenditures in the _____ market. both buyers in the resource market. capital. 97. wage. B. B. product. resource.The Market System and the Circular Flow 93. capital. product 96. product 95.Chapter 02 . D. capital. sellers in the product and resource markets respectively. 94. both sellers in the product market. In the circular flow model: A. In terms of the circular flow diagram. D. resource D. Flow (4) represents: A. rent. households receive income through the product market. product. financial B. A. businesses neither buy nor sell resources. B. Refer to the above diagram. product. sellers in the resource and product markets respectively. C.

goods and services respectively. resources and goods respectively. Arrows (1) and (3) are associated with: A. 2-22 . consumer expenditures and income respectively.Chapter 02 . D. 99. B. incomes and consumer expenditures respectively. D. output and money incomes respectively. C. the money market. C. B. Refer to the above diagram. D. Refer to the above diagram. Arrows (3) and (4) represent: A. the product market. B. C. 100. resources and goods respectively. international trade. Arrows (1) and (2) represent: A. the resource market. Refer to the above diagram. money incomes and output respectively. goods and resources respectively.The Market System and the Circular Flow 98.

North Korea's command economy: A. the owner of the furniture store uses some of the money from the sale to pay her supplier. C. magnifying the effect on the economy. prompting the company to hire more workers. All of the above. B. is one of the few remaining command economies. Adverse effects in one market can spill over into other markets. North Korea's market economy has significantly outperformed South Korea's command economy. South Korea's market economy has significantly outperformed North Korea's command economy. C. and uses the rest to take her family out to dinner. and profit will tend to equalize. North Korea's command economy has significantly outperformed South Korea's market economy. B. rent. Evan buys a new couch. interest. C. B. B. South Korea's command economy has significantly outperformed North Korea's market economy. Prices of goods and services will tend to remain stable over time.The Market System and the Circular Flow 101. Bobbie goes to work and builds cars. Which of the following best illustrates the circular flow model in action? A. (Consider This) Since World War II: A. 102. 104.000.Chapter 02 . Boeing experiences a surge in orders for new airplanes. D. produces a per capita GDP of nearly $25. has grown much faster than South Korea since the two countries were divided after World War II. D. and uses the income she receives to buy food at the grocery store. has undergone significant market reforms and is now one of the fastest growing economies. C. D. Negative events in one part of the economy are isolated in their effect. D. The shares of total resource income going to wages. Which of the following is an implication of the circular flow model? A. 103. 2-23 .

Market economies use capital goods because they improve productive efficiency. 107. C. consumer sovereignty.The Market System and the Circular Flow 105. arranging resources under the market system is much like shuffling a deck of cards. B. C. consumer sovereignty. technological change. because government has become highly effective at central planning. 106. (Consider This) In 1996 McDonald's introduced its Arch Deluxe hamburger. upsloping supply. B. C. B. True False 2-24 . D. 108. which failed to catch on with the public and was subsequently dropped from the menu. (Consider This) In 1975 McDonald's introduced its Egg McMuffin breakfast sandwich. opportunity cost. private property eliminates the possibility that resource arrangements will be random. C. D. (Last Word) According to economist Donald Boudreaux: A. the market system threatens to do irreparable harm to the world's ecosystem. downsloping demand.Chapter 02 . through random trial and error. This failure illustrates the idea of: A. (Last Word) According to economist Donald Boudreaux. B. D. the market system works wondrously for advanced industrial nations but not for developing nations. True / False Questions 109. which remains popular and profitable today. D. specialization. because people tend to be creative and orderly. the world's tens of billions of individual resources get arranged productively: A. This longevity illustrates the idea of: A. because private property encourages people to consider the alternative uses of their resources and select those that provide the most rewards. specialization.

land owners. True False 112. and capital suppliers less payments to the entrepreneur for organizing and combining the other resources used to produce a good. True False 116. Costs can be defined as total payments made to workers. Money functions as a medium of exchange by eliminating the need for a coincidence of wants.The Market System and the Circular Flow 110. True False 111. True False 115. True False 113. Continued losses in an industry will cause some firms to reduce output or eventually leave the industry. True False 2-25 . Specialization may expand total output even though the individuals involved may have identical abilities. Programs by state governments to keep milk prices higher than market-determined prices to protect family dairy farms from bankruptcy promote the efficient allocation of resources. True False 114.Chapter 02 . The wants of consumers are expressed in the product market with "dollar votes". Consumer sovereignty means that legislation now protects the rights of consumers to dispose of their incomes as they see fit.

True False 119. True False 2-26 . Central planning is plagued with a coordination problem and an incentive problem. True False 120.Chapter 02 .The Market System and the Circular Flow 117. True False 118. 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. The guiding function of prices tends to keep resources flowing toward their most highly valued uses. The invisible hand refers to the many indirect controls that the Federal government imposes in a market system.

wide-spread dispersion of economic power.The Market System and the Circular Flow Chapter 02 The Market System and the Circular Flow Answer Key Multiple Choice Questions 1. The two general types of economic systems that exist today are: A. D. private ownership of all capital. central planning. and money. market systems and capitalism. AACSB: Analytical Skills Bloom's: Knowledge Learning Objective: 2-1 Topic: Economic systems 2. socialism and central planning. D. market systems and command systems. C. C. a circular flow of goods. public ownership of all capital. C. AACSB: Analytical Skills Bloom's: Knowledge Learning Objective: 2-1 Topic: Economic systems 2-27 . B.Chapter 02 . B. wide-spread private ownership of capital. laissez faire systems and pure command systems. B. Which of the following is a distinguishing feature of a command system? A. AACSB: Analytical Skills Bloom's: Knowledge Learning Objective: 2-1 Topic: Economic systems 3. central planning. heavy reliance on markets. resources. D. Which of the following is a distinguishing feature of a market system? A.

"circular flow. Cuba and North Korea.The Market System and the Circular Flow 4. C. Of the following countries. C. Cuba. AACSB: Reflective Thinking Skills Bloom's: Application Learning Objective: 2-1 Topic: Economic systems 5." B. Canada." AACSB: Analytical Skills Bloom's: Knowledge Learning Objective: 2-1 Topic: Economic systems 2-28 . Mexico and Brazil. D. B. B. Examples of command economies are: A. Sweden and Norway.Chapter 02 . "there is no free lunch. The United States and Japan. AACSB: Reflective Thinking Skills Bloom's: Application Learning Objective: 2-1 Topic: Economic systems 6. "public ownership. the one that best exhibits the characteristics of a market economy is: A. The French term "laissez-faire" means: A. North Korea. D." D. "let it be." C. China.

D. C. D. C. is peculiar to the United States economy. requires a grouping of private markets linked to one another. government should not interfere with the operation of the economy. government action is necessary if the economy is to achieve full employment and full production.Chapter 02 . requires some sort of centralized authority (such as government) to coordinate economic activity. is peculiar to market systems. An economic system: A. Economic scarcity: A. land and other natural resources should be publicly owned. but capital should be publicly owned. The term laissez-faire suggests that: A. is a plan or scheme that allows a firm to make money at some other firm's expense. land and other natural resources should be privately owned. but capital equipment should be privately owned. C.The Market System and the Circular Flow 7. D. AACSB: Analytical Skills Bloom's: Understanding Learning Objective: 2-1 Topic: Economic systems 2-29 . is a particular set of institutional arrangements and a coordinating mechanism used to respond to the economizing problem. B. B. applies to all economies. AACSB: Analytical Skills Bloom's: Understanding Learning Objective: 2-1 Topic: Economic systems 9. B. AACSB: Analytical Skills Bloom's: Knowledge Learning Objective: 2-1 Topic: Economic systems 8. is peculiar to command systems.

B. as it does in a market system. C. market systems. D. money is not used. B. AACSB: Analytical Skills Bloom's: Knowledge Learning Objective: 2-1 Topic: Economic systems 11.Chapter 02 . The political system in place. and who gets them. and the degree of scarcity facing the economy. C. Command systems are also known as: A.The Market System and the Circular Flow 10. The technology used in production. AACSB: Analytical Skills Bloom's: Knowledge Learning Objective: 2-1 Status: New Topic: Economic systems 12. D. whereas it is in a market system. B. whereas there is no government in a market system. the division of output is decided by central planning rather than by individuals operating freely through markets. Economic systems differ according to what two main characteristics? A. A fundamental difference between the command system and the market system is that. and the quantity and quality of natural resources. How goods are produced. in command systems: A. D. communism. all economic decisions are made by the government. AACSB: Analytical Skills Bloom's: Understanding Learning Objective: 2-1 Status: New Topic: Economic systems 2-30 . pure capitalism. C. Who owns the factors of production. laissez-faire capitalism. scarcity does not exist. and the methods used to coordinate economic activity.

property rights. AACSB: Analytical Skills Bloom's: Knowledge Learning Objective: 2-2 Topic: Characteristics of the market system 14. unselfish behavior. B. competition in product and resource markets. AACSB: Analytical Skills Bloom's: Understanding Learning Objective: 2-2 Topic: Characteristics of the market system 2-31 . C. government ownership of the major industries. D. D. C. capital goods. government-set wages and prices. C. central planning by government. Which of the following is not a characteristic of the market system? A. private property. property rights.Chapter 02 . human capital. freedom of enterprise. AACSB: Analytical Skills Bloom's: Knowledge Learning Objective: 2-2 Topic: Characteristics of the market system 15.The Market System and the Circular Flow 13. B. B. Copyrights and trademarks are examples of: A. D. public goods. Which of the following is a fundamental characteristic of the market system? A.

B. D. C. The pursuit of self-interest: A. AACSB: Analytical Skills Bloom's: Knowledge Learning Objective: 2-2 Topic: Characteristics of the market system 2-32 . AACSB: Analytical Skills Bloom's: Understanding Learning Objective: 2-2 Topic: Characteristics of the market system 17. D. B. increasing opportunity costs and diminishing marginal utility. D. C." C. specialization. private property and freedom of expression. independently acting buyers and sellers and freedom to enter or leave markets. is highly detrimental to the market system. self-interest. Broadly defined. but not in the behavior of consumers. is reflected in the behavior of firms. competition involves: A. capital goods and division of labor.The Market System and the Circular Flow 16. means the same as "selfishness.Chapter 02 . private property. competition. The regulatory mechanism of the market system is: A. B. gives direction to the market system. AACSB: Analytical Skills Bloom's: Understanding Learning Objective: 2-2 Topic: Characteristics of the market system 18.

B. AACSB: Analytical Skills Bloom's: Understanding Learning Objective: 2-2 Topic: Characteristics of the market system 20. a product can be purchased at a number of different prices. D. Well-defined property rights: A.The Market System and the Circular Flow 19. B. D. encourage owners to maintain or improve their property. B. C. each worker performs a large number of tasks. there are independently-acting buyers and sellers in each market. there is more than one seller in a market.Chapter 02 . Competition means that: A. sellers can manipulate market price by causing product scarcities. AACSB: Reflective Thinking Skills Bloom's: Understanding Learning Objective: 2-2 Topic: Characteristics of the market system 21. labor markets are geographically segmented. unskilled workers outnumber skilled workers. impede exchange. The division of labor means that: A. D. AACSB: Analytical Skills Bloom's: Knowledge Learning Objective: 2-2 Topic: Characteristics of the market system 2-33 . discourage investment and growth. C. C. discourage hard work. workers specialize in various production tasks.

D. allows everyone to have a job which they like. allows society to have fewer capital goods. results in greater total output.Chapter 02 . D. guarantees full employment. Specialization in production is economically beneficial primarily because it: A. C. C. Specialization in production is important primarily because it: A. allowing workers to develop skills by working on one. Specialization–the division of labor–enhances productivity and efficiency by: A. B. permits the production of a larger output with fixed amounts of resources. avoiding the time loss involved in shifting from one production task to another. allows society to avoid the coincidence-of-wants problem. C. D.The Market System and the Circular Flow 22. or a limited number. facilitates trade by bartering. AACSB: Analytical Skills Bloom's: Understanding Learning Objective: 2-2 Topic: Characteristics of the market system 23. of tasks. B. allowing workers to take advantage of existing differences in their abilities and skills. all of the means identified in the other answers. AACSB: Analytical Skills Bloom's: Understanding Learning Objective: 2-2 Topic: Characteristics of the market system 24. B. allows society to trade by barter. AACSB: Analytical Skills Bloom's: Understanding Learning Objective: 2-2 Topic: Characteristics of the market system 2-34 .

Chapter 02 . that money will not be needed to accomplish the desired exchanges. a coincidence of wants exists between Michigan and Texas. that there is no means by which Michigan can obtain lettuce while specializing in the production of autos. a coincidence of wants exists between Texas and Washington. C. D. C. a coincidence of wants exists between Michigan and Washington. C. On the basis of the above information and assuming trade occurs between the three states we can expect: A. On the basis of the above information it can be said that: A. money to flow clockwise from Michigan to Washington to Texas.The Market System and the Circular Flow 25. D. money to flow counterclockwise from Michigan to Texas to Washington. Washington to exchange apples with Michigan and receive money in return. Texas to trade lettuce directly for Washington apples. Given the above information and assuming trade occurs between the three states we can expect: A. D. Texas to exchange lettuce with Michigan and receive autos in return. AACSB: Reflective Thinking Skills Bloom's: Application Learning Objective: 2-2 Topic: Characteristics of the market system 2-35 . AACSB: Analytical Skills Bloom's: Understanding Learning Objective: 2-2 Topic: Characteristics of the market system 26. Washington to exchange apples with Texas and receive money in return. AACSB: Reflective Thinking Skills Bloom's: Application Learning Objective: 2-2 Topic: Characteristics of the market system 27. B. B. no coincidence of wants exists between any two states. B.

B. D. Barter: A. accounts for over 30 percent of the dollar volume of all exchange in the U. money must be used as a medium of exchange or trade will never occur. roundabout production could not occur without the availability of money. governmental direction of the production and distribution of output can be avoided by using money. entails the exchange of goods for goods. D. The coincidence-of-wants problem associated with barter refers to the fact that: A. D. for exchange to occur each seller must have a product that some buyer wants. The use of money contributes to economic efficiency because: A. economy. buyers in resource markets and sellers in product markets can never engage in exchange. is the major means of exchange in centrally planned economies. C.Chapter 02 . is used to circumvent the problem of a lack of coincidence of wants among potential buyers and sellers.S. C. it promotes specialization by overcoming the problems with barter. B. specialization is restricted by the size or scope of a market.The Market System and the Circular Flow 28. AACSB: Analytical Skills Bloom's: Knowledge Learning Objective: 2-2 Topic: Characteristics of the market system 29. AACSB: Analytical Skills Bloom's: Understanding Learning Objective: 2-2 Topic: Characteristics of the market system 2-36 . B. it is necessary for the creation of capital goods. C. AACSB: Analytical Skills Bloom's: Understanding Learning Objective: 2-2 Topic: Characteristics of the market system 30.

Which products will be in scarce supply and which in excess supply? B.The Market System and the Circular Flow 31. freedom of enterprise and choice AACSB: Analytical Skills Bloom's: Understanding Learning Objective: 2-2 Status: New Topic: Characteristics of the market system 33. AACSB: Analytical Skills Bloom's: Understanding Learning Objective: 2-2 Status: New Topic: Characteristics of the market system 32. B. the widespread use of money D. there is an active role for government. command systems are superior to market systems in the allocation of resources. D. competition among buyers and sellers pursuing monetary returns C.Chapter 02 . The presence of market failures implies that: A. individuals and firms should strive to be self-sufficient rather than specialize. Who should appoint the head of the central bank? C. How much should the society save? D. money is not an effective tool for exchange in a market system. Which of the following characteristics is least unique to a market system? A. C. Which of the following is one of the Five Fundamental Questions? A. What goods and services will be produced? AACSB: Analytical Skills Bloom's: Knowledge Learning Objective: 2-3 Topic: Five fundamental questions 2-37 . even in a market system. private ownership of property resources B.

AACSB: Analytical Skills Bloom's: Understanding Learning Objective: 2-3 Topic: Five fundamental questions 35. C.The Market System and the Circular Flow 34. but no new firms will enter the market. rents. If competitive industry Z is making substantial economic profit. expand in industry Z. D. D.Chapter 02 . and firms will likely leave the market. economic profits. B. as more resources will move to that industry. achieve full employment and price level stability. expand in industry Z. AACSB: Reflective Thinking Skills Bloom's: Application Learning Objective: 2-3 Learning Objective: 2-4 Topic: Five fundamental questions 36. C. AACSB: Reflective Thinking Skills Bloom's: Understanding Learning Objective: 2-3 Learning Objective: 2-4 Topic: Five fundamental questions 2-38 . fall in industry Z. contribute to a more equal distribution of income. output will: A. B. D. wages. C. promote the equal distribution of real assets and wealth. payments made to the entrepreneur for organizing production. From society's point of view the economic function of profits and losses is to: A. B. Which of the following is not an economic cost? A. fall in all industries except industry Z. reallocate resources from less desired to more desired uses.

C. In a market economy a significant change in consumers' desire for product X will: A. AACSB: Reflective Thinking Skills Bloom's: Application Learning Objective: 2-3 Learning Objective: 2-4 Topic: Five fundamental questions 38.Chapter 02 . is the size that consumers want it to be. has excess production capacity. are both considered by economists to be a part of production costs. B. D. cause some industries to expand and others to contract. have no influence on the composition of the domestic output. Economic profits in an industry suggest the industry: A.The Market System and the Circular Flow 37. are essential to the reallocation of resources from less desired goods to more desired goods. do all of these. alter the profits or losses received by certain firms. C. B. D. equalize the distribution of income in the long run. C. can earn more profits by increasing product price. D. AACSB: Analytical Skills Bloom's: Understanding Learning Objective: 2-3 Learning Objective: 2-4 Topic: Five fundamental questions 2-39 . cause a reallocation of scarce resources. should be larger to better satisfy consumers' desire for the product. AACSB: Reflective Thinking Skills Bloom's: Analysis Learning Objective: 2-3 Topic: Five fundamental questions 39. B. Economic profits and losses: A.

The Market System and the Circular Flow 40. a decrease in the quantity of resources employed in industry X. an increase in the quantity of resources employed by industry X. C. reduce the need for strawberry pickers. reduce the supply of strawberries. If consumer desire for product X increases. increase the number of strawberry pickers needed by farmers. an increase in the profits of industry X. expand as resources move away from industry Y. all of the following will occur except: A. reduce the number of people willing to pick strawberries. contract as resources move away from industry Y. an increase in the output of industry X. AACSB: Reflective Thinking Skills Bloom's: Understanding Learning Objective: 2-3 Learning Objective: 2-4 Topic: Five fundamental questions 2-40 . D. C. B. D. D. expand as resources move toward industry Y. An increase in consumer desire for strawberries is most likely to: A.Chapter 02 . If competitive industry Y is incurring substantial losses. AACSB: Reflective Thinking Skills Bloom's: Application Learning Objective: 2-3 Learning Objective: 2-4 Topic: Five fundamental questions 42. contract as resources move toward industry Y. output will: A. B. B. C. AACSB: Reflective Thinking Skills Bloom's: Application Learning Objective: 2-3 Learning Objective: 2-4 Topic: Five fundamental questions 41.

total opportunity cost to be zero. eliminate small firms and reduce competition. D. B. tell government which industries need to be subsidized. prices: A.Chapter 02 . C. influence consumers in their purchases of goods and services. D. In a competitive economy. influence businesses in their purchases of economic resources. do all of these. signal that resources should be reallocated. total revenue to be zero. B. influence workers in making occupational choices. more resources to flow to that industry. bring about a more equal distribution of income. The economic function of profits and losses is to: A. AACSB: Analytical Skills Bloom's: Understanding Learning Objective: 2-3 Learning Objective: 2-4 Topic: Five fundamental questions 44. B. C. C. AACSB: Analytical Skills Bloom's: Understanding Learning Objective: 2-3 Topic: Five fundamental questions 45.The Market System and the Circular Flow 43. we would expect: A. economic profits to be zero. If a competitive industry is neither expanding nor contracting. D. AACSB: Reflective Thinking Skills Bloom's: Understanding Learning Objective: 2-3 Topic: Five fundamental questions 2-41 .

discourages innovation because firms want to get all the profits possible from existing machinery and equipment.Chapter 02 . discourages innovation because it is difficult to acquire additional capital in the form of new machinery and equipment. AACSB: Reflective Thinking Skills Bloom's: Understanding Learning Objective: 2-4 Topic: Five fundamental questions 48. consumer needs and preferences. B. B. In a market economy the distribution of output will be determined primarily by: A.The Market System and the Circular Flow 46. C. Firms will enter the industry and output will rise. encourages innovation because government provides tax breaks and subsidies to those who develop new products or new productive techniques. Firms will enter the industry and output will fall. The competitive market system: A. encourages innovation because successful innovators are rewarded with economic profits. C. Firms will leave the industry and output will rise. B. D. C. Suppose industry A is realizing substantial economic profit. a social consensus as to what distribution of income is most equitable. the quantities and prices of the resources that households supply. D. Which of the following best describes what will happen in this competitive market? A. AACSB: Reflective Thinking Skills Bloom's: Application Learning Objective: 2-4 Topic: Five fundamental questions 47. D. Firms will leave the industry and output will fall. AACSB: Analytical Skills Bloom's: Understanding Learning Objective: 2-3 Topic: Five fundamental questions 2-42 . government regulations that provide a minimum income for all.

conserves most on the use of labor. #2 and #4. capital. The most efficient combination of resources in producing any output is the combination that: A. C. In view of the indicated resource prices.The Market System and the Circular Flow 49. labor. can be obtained for the smallest money outlay. D. AACSB: Analytical Skills Bloom's: Analysis Learning Objective: 2-3 Topic: Five fundamental questions 2-43 . B. the economically most efficient production technique(s) is (are) technique(s): A. AACSB: Analytical Skills Bloom's: Knowledge Learning Objective: 2-3 Topic: Five fundamental questions Answer the next question(s) using the following data which show all available techniques for producing 20 units of a particular commodity: 50. B. #1 and #3. D. C. uses the smallest total quantity of all resources. #1. Refer to the above data. #3. comes closest to using the same quantities of land. and entrepreneurial ability.Chapter 02 .

and 2 of entrepreneurial ability. the firm will: A. not earn any economic profit. C. realize an economic profit of $10. B. C. 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. be adopted because it would lower production costs and increase economic profit.Chapter 02 . AACSB: Analytical Skills Bloom's: Analysis Learning Objective: 2-3 Topic: Five fundamental questions Answer the next question(s) 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. 1 of capital.The Market System and the Circular Flow 51. although it reduces production costs. D. not be adopted because. Refer to the above data. be adopted. 2-44 . D. AACSB: Analytical Skills Bloom's: Application Learning Objective: 2-3 Topic: Five fundamental questions 52. B. not be adopted because it entails higher production costs than other available techniques. realize an economic profit of $4. even though economic profits would be reduced slightly. this technique would: A. close down rather than incur a loss by producing. Assume the prices of labor and capital are $2 and $3 respectively. If a new production technique is developed that enables a firm to produce 20 units of output with 3 units of land. it does not increase profit. 3 of labor. Refer to the above data.

Refer to the above information. I B. D. B. IV AACSB: Analytical Skills Bloom's: Analysis Learning Objective: 2-3 Topic: Five fundamental questions 54.Chapter 02 . AACSB: Reflective Thinking Skills Bloom's: Understanding Learning Objective: 2-3 Topic: Five fundamental questions 2-45 . a loss of $3. "dollar voting" by consumers mandates such a choice. an economic profit of $2. this will prevent new firms from entering the industry. an economic profit of $6. II C. Which technique is economically most efficient in producing A? A. an economic profit of $4. III D. B. the firm will realize: A. to do so will maximize the firms' profits.50. D. AACSB: Analytical Skills Bloom's: Application Learning Objective: 2-3 Topic: Five fundamental questions 55. If the price of product A is $0. In a competitive market economy firms will select the least-cost production technique because: A. such choices will result in the full employment of available resources. C. Refer to the above information. C.The Market System and the Circular Flow 53.

"Goods and service that can be produced using large amounts of capital." AACSB: Reflective Thinking Skills Bloom's: Understanding Learning Objective: 2-3 Topic: Five fundamental questions 57." AACSB: Reflective Thinking Skills Bloom's: Understanding Learning Objective: 2-3 Topic: Five fundamental questions 58." B." C. The market system's answer to the fundamental question "What will be produced?" is essentially: A. "Those who physically produced them. "Those willing and able to pay for them." C.Chapter 02 ." D. "Those who get utility from them.The Market System and the Circular Flow 56. "Those who most need them. "With as much machinery as possible. "Goods and services that possess lasting value. "Low cost goods and services. "Goods and services that are profitable." B. "Using the least-cost production techniques. The market system's answer to the fundamental question "Who will get the goods and services?" is essentially: A. "Using the latest technology." C." AACSB: Reflective Thinking Skills Bloom's: Understanding Learning Objective: 2-3 Topic: Five fundamental questions 2-46 . "By exploiting labor. The market system's answer to the fundamental question "How will the goods and services be produced?" is essentially: A." D." D." B.

" B. "Through training and retraining programs. C. creative destruction. The advent of DVDs has virtually demolished the market for videocassettes. This is an example of: A. "Through government funded research programs. "Through random trial and error. derived demand." D. The market system's answer to the fundamental question "How will the system accommodate change?" is essentially: A." AACSB: Reflective Thinking Skills Bloom's: Understanding Learning Objective: 2-4 Topic: Five fundamental questions 60." D.Chapter 02 . B. "Through government leadership and direction. "Through the guiding function of prices and the incentive function of profits. AACSB: Reflective Thinking Skills Bloom's: Application Learning Objective: 2-4 Topic: Five fundamental questions 2-47 . "Through the profit potential that encourages development of new technology. "Through the redistribution of income to promote greater equality." C.The Market System and the Circular Flow 59. capital accumulation." C. D." B. "Through training and retraining programs." AACSB: Reflective Thinking Skills Bloom's: Understanding Learning Objective: 2-4 Topic: Five fundamental questions 61. The market system's answer to the fundamental question "How will the system promote progress?" is essentially: A. the difference between normal and economic profits.

D. C. The dollar votes of consumers ultimately determine the composition of output and the allocation of resources in a market economy. What goods and services will be produced? D. derived demand. AACSB: Analytical Skills Bloom's: Knowledge Learning Objective: 2-3 Topic: Five fundamental questions 64. Consumer sovereignty refers to the: A. Which of the following is not one of the five fundamental questions? A. the invisible hand. How will the system promote progress? AACSB: Analytical Skills Bloom's: Knowledge Learning Objective: 2-3 Status: New Topic: Five fundamental questions 2-48 . B. Who will get the goods and services? C. idea that the pursuit of self-interest is in the public interest.Chapter 02 . What prices will be charged for goods and services? B. fact that a Federal agency exists to protect consumers from harmful and defective products. AACSB: Analytical Skills Bloom's: Understanding Learning Objective: 2-3 Topic: Five fundamental questions 63. C. idea that the decisions of producers must ultimately conform to consumer demands.The Market System and the Circular Flow 62. consumer sovereignty. D. fact that resource prices are higher than product prices in capitalistic economies.. B. This statement best describes the concept of: A. market failure.

The market system is the best system for overcoming the scarce resources-unlimited wants problem. Central direction by the government will improve resource allocation in a capitalistic economy. C. AACSB: Analytical Skills Bloom's: Understanding Learning Objective: 2-3 Topic: Invisible hand 2-49 . The nonsubstitutability of resources creates a conflict between private and public interests and calls for government intervention. The invisible hand refers to the: A. D. AACSB: Analytical Skills Bloom's: Understanding Learning Objective: 2-3 Status: New Topic: Five fundamental questions 66. fact that the U.Chapter 02 . fact that government controls the functioning of the market system. buyers determine what will be produced based on their "dollar votes" for the goods and services offered by sellers.The Market System and the Circular Flow 65. buyers control the quality of goods and services through regulatory agencies. under competition. advertising is ineffective because consumers already know what they want. D. B.S. "Consumer sovereignty" means that: A. buyers can dictate the prices at which goods and services will be purchased. B. C. tax system redistributes income from rich to poor. AACSB: Analytical Skills Bloom's: Knowledge Learning Objective: 2-3 Topic: Invisible hand 67. notion that. The desires of resource suppliers and producers to further their own self-interest will automatically further the public interest. Which of the following best describes the invisible-hand concept? A. C. D. B. tendency of monopolistic sellers to raise prices above competitive levels. decisions motivated by self-interest promote the social interest.

government action is necessary to correct for market failures. Two major virtues of the market system are that it: A.The Market System and the Circular Flow 68. C. B. B. The invisible-hand concept suggests that: A. D. market failures imply the need for a national economic plan. big businesses are inherently more efficient than small businesses. the competitiveness of a capitalistic market economy invariably diminishes over time. AACSB: Reflective Thinking Skills Bloom's: Understanding Learning Objective: 2-3 Topic: Invisible hand 2-50 . when firms maximize their profits. society's output will also be maximized. AACSB: Reflective Thinking Skills Bloom's: Understanding Learning Objective: 2-3 Topic: Invisible hand 70. results in price level stability and a fair personal distribution of income. D. changes in product demands are only randomly reflected in changes in the demands for resources. The invisible-hand concept suggests that: A. results in an equitable personal distribution of income and always maintains full employment. B. D. private and public interests will coincide. eliminates discrimination and minimizes environmental pollution. assuming competition. profit maximization is inconsistent with an efficient allocation of resources.Chapter 02 . C. C. allocates resources efficiently and allows economic freedom. AACSB: Reflective Thinking Skills Bloom's: Understanding Learning Objective: 2-3 Topic: Invisible hand 69.

individuals will produce goods for others out of concern for their fellow human beings. C. government should regulate the business to ensure quality. The invisible hand promotes society's interests because: A.The Market System and the Circular Flow 71. AACSB: Reflective Thinking Skills Bloom's: Application Learning Objective: 2-3 Status: New Topic: Invisible hand 73. According to the concept of the "invisible hand. B. has slowly lost ground to emerging command systems. produces considerable inefficiency in the use of scarce resources. D. this demonstrates that consumer sovereignty is not present in this market. government regulation pushes business into producing the right mix of goods and services. it makes sure that everyone wins from competition in the market. B. AACSB: Reflective Thinking Skills Bloom's: Understanding Learning Objective: 2-3 Topic: Invisible hand 72. she has served society's interests by providing a desired good or service. D. individuals pursuing their self-interest will try to produce goods and services that people in society want and are willing to purchase." if Susie opens and operates a profitable childcare center. AACSB: Reflective Thinking Skills Bloom's: Understanding Learning Objective: 2-3 Status: New Topic: Invisible hand 2-51 . D. C. The market system: A. B. is inconsistent with freedom of choice in the long run. C.Chapter 02 . then: A. the profit Susie earns indicates that she is overcharging for her services. effectively harnesses the incentives of workers and entrepreneurs.

self-sufficiency dilemma under communism. C. B. coordination problem under central planning. resource overcommitment problem under communism. incentive problem under central planning. coordination problem under central planning. C. B. The coordination problem in the centrally planned economies refers to the idea that: A. D. self-sufficiency dilemma under communism. AACSB: Reflective Thinking Skills Bloom's: Application Learning Objective: 2-1 Topic: Demise of the command systems 2-52 . planners had to direct required inputs to each enterprise. the immediate effect of more investment was less consumption. resource overcommitment problem under communism. 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. C. AACSB: Reflective Thinking Skills Bloom's: Application Learning Objective: 2-1 Topic: Demise of the command systems 76. D." This quotation best identifies the: A. exports had to be equal to imports for a central plan to work. "Under central planning." This quotation best identifies the: A. incentive problem under central planning.Chapter 02 . the failure of any single industry to fulfill the output quantities specified in the central plan caused a chainreaction of adverse repercussions on production.The Market System and the Circular Flow 74. D. This is a nearly impossible task without markets and profits. the price level and the level of employment were inversely related. "Because the outputs of many industries are the inputs to other industries. AACSB: Analytical Skills Bloom's: Understanding Learning Objective: 2-1 Topic: Demise of the command systems 75. B.

Chapter 02 . but they present no such opportunities under central planning. incentive problem under communist central planning. the immediate effect of more investment was less consumption. coordination problem under communist central planning. B. Suppose that an individual sees a tremendous opportunity to produce and sell a new product. D. but dismisses the idea because there is no way to exploit this opportunity for personal gain. Shortages and unmet demand provide opportunities for individuals and firms to profit under capitalism. This reality represents central planning's: A. and entrepreneurs could not personally gain by responding to shortages or surpluses or by introducing new and improved products. X-efficiency problem. incentive problem. self-sufficiency dilemma under communism. workers. AACSB: Reflective Thinking Skills Bloom's: Application Learning Objective: 2-1 Topic: Demise of the command systems 79. C. D. planners had to direct required inputs to each enterprise. C. D. asymmetric information problem under communism. AACSB: Reflective Thinking Skills Bloom's: Understanding Learning Objective: 2-1 Topic: Demise of the command systems 2-53 . C. The incentive problem under communist central planning refers to the idea that: A.The Market System and the Circular Flow 77. managers. B. paradox of value. B. AACSB: Reflective Thinking Skills Bloom's: Understanding Learning Objective: 2-1 Topic: Demise of the command systems 78. coordination problem. This situation best identifies the: A. exports had to be equal to imports for a central plan to work.

product-mix met consumer needs. B. production targets were often increased when innovation occurred. there was too much domestic business competition. AACSB: Reflective Thinking Skills Bloom's: Understanding Learning Objective: 2-1 Topic: Demise of the command systems 81. D. technological advance was too rapid. AACSB: Reflective Thinking Skills Bloom's: Analysis Learning Objective: 2-1 Topic: Demise of the command systems 82.The Market System and the Circular Flow 80. there was too much competition from foreign firms. C. B. 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. exports had to equal imports for the plan to work.Chapter 02 . product quality was neglected. Innovation lagged in the centrally planned economies because: A. C. enterprises resisted innovation in fear that their production targets would be raised. Enterprise managers and workers in the Soviet Union often resisted innovations in production methods because: A. workers could not be reallocated geographically. there was a chronic shortage of computers. AACSB: Reflective Thinking Skills Bloom's: Knowledge Learning Objective: 2-1 Topic: Demise of the command systems 2-54 . innovations ordinarily increased dependence on world markets. production costs were minimized. D. D. B. C.

poor quality goods. If products were in short or surplus supply in the Soviet Union: A.The Market System and the Circular Flow 83.Chapter 02 . D. B. households are on the selling side of the resource market and on the buying side of the product market. The simple circular flow model shows that: A. C. C. C. businesses are on the selling side of both product and resource markets. D. AACSB: Reflective Thinking Skills Bloom's: Knowledge Learning Objective: 2-1 Topic: Demise of the command systems 84. AACSB: Reflective Thinking Skills Bloom's: Knowledge Learning Objective: 2-1 Topic: Demise of the command systems 85. the failure to provide promised consumer goods. B. all of these. the planners would immediately adjust production to achieve equilibrium. price and profit signals eliminated those shortages and surpluses. D. a declining growth rate. B. AACSB: Analytical Skills Bloom's: Knowledge Learning Objective: 2-5 Topic: Circular flow model 2-55 . households are on the buying side of both product and resource markets. price and profit signals intensified those shortages and surpluses. businesses are on the buying side of the product market and on the selling side of the resource market. The failure of Soviet central planning was reflected in: A. producers would not react because no price or profit signals occurred.

firms sell raw materials to households. Which of the following is a limitation of the simple circular flow model? A. free and controlled. AACSB: Analytical Skills Bloom's: Knowledge Learning Objective: 2-5 Topic: Circular flow model 88. D. product and resource. resource markets are ignored.Chapter 02 . households are included. B. capital goods and consumer goods. household and business. B. C. AACSB: Analytical Skills Bloom's: Understanding Learning Objective: 2-5 Topic: Circular flow model 2-56 . businesses borrow financial capital from households. D. the determination of product and resource prices is not explained. D. In the resource market: A. households sell resources to businesses. businesses sell services to households. but not businesses.The Market System and the Circular Flow 86. C. B. C. product markets are ignored. The two basic markets shown by the simple circular flow model are: A. AACSB: Analytical Skills Bloom's: Knowledge Learning Objective: 2-5 Topic: Circular flow model 87.

D. wage. there are real flows of goods. D. B. but not money flows. households are sellers of final products. labor. land.Chapter 02 . interest. consumer expenditures. services. Refer to the above diagram. C. rent. goods and services. AACSB: Analytical Skills Bloom's: Understanding Learning Objective: 2-5 Topic: Circular flow model 2-57 . capital. households are buyers of resources. In the simple circular flow model: A. C. B. businesses are sellers of final products.The Market System and the Circular Flow 89. Flow (1) represents: A. and entrepreneurial ability. and resources. AACSB: Analytical Skills Bloom's: Knowledge Learning Objective: 2-5 Topic: Circular flow model 90. and profit income.

interest. labor. wage. Flow (4) represents: A. B. and profit income. labor. land. C.The Market System and the Circular Flow 91. wage. land. and entrepreneurial ability. capital. Refer to the above diagram. AACSB: Analytical Skills Bloom's: Understanding Learning Objective: 2-5 Topic: Circular flow model 2-58 . Flow (3) represents: A. consumer expenditures. D. rent. and entrepreneurial ability. Flow (2) represents: A. wage. AACSB: Analytical Skills Bloom's: Understanding Learning Objective: 2-5 Topic: Circular flow model 93. B. consumer expenditures. rent. interest. Refer to the above diagram. and profit income. C. capital. land. rent. and entrepreneurial ability. labor. Refer to the above diagram.Chapter 02 . D. B. and profit income. consumer expenditures. interest. goods and services. D. capital. C. goods and services. AACSB: Analytical Skills Bloom's: Understanding Learning Objective: 2-5 Topic: Circular flow model 92. goods and services.

In terms of the circular flow diagram. resource. AACSB: Analytical Skills Bloom's: Knowledge Learning Objective: 2-5 Topic: Circular flow model 2-59 . capital. product. resource. product. A. product. product. product AACSB: Analytical Skills Bloom's: Knowledge Learning Objective: 2-5 Topic: Circular flow model 95. businesses obtain revenue through the _____ market and make expenditures in the _____ market. product C. C.The Market System and the Circular Flow 94. households make expenditures in the _____ market and receive income through the _____ market. resource D. D. A. product AACSB: Analytical Skills Bloom's: Knowledge Learning Objective: 2-5 Topic: Circular flow model 96. both sellers in the product market. capital. financial B. both buyers in the resource market. sellers in the resource and product markets respectively. financial B. sellers in the product and resource markets respectively. B. resource D. product C. In terms of the circular flow diagram. Households and businesses are: A.Chapter 02 .

Arrows (1) and (2) represent: A. D. households spend income in the resource market. C. B. Refer to the above diagram. D.Chapter 02 . output and money incomes respectively. households sell resources to firms. resources and goods respectively. C. In the circular flow model: A. money incomes and output respectively. B.The Market System and the Circular Flow 97. businesses neither buy nor sell resources. AACSB: Analytical Skills Bloom's: Knowledge Learning Objective: 2-5 Topic: Circular flow model 2-60 . AACSB: Analytical Skills Bloom's: Knowledge Learning Objective: 2-5 Topic: Circular flow model 98. households receive income through the product market. goods and resources respectively.

the money market. goods and services respectively. C. incomes and consumer expenditures respectively. B. C. resources and goods respectively. interest. Which of the following is an implication of the circular flow model? A. Arrows (3) and (4) represent: A. and profit will tend to equalize. Negative events in one part of the economy are isolated in their effect. Prices of goods and services will tend to remain stable over time. international trade. Adverse effects in one market can spill over into other markets. Arrows (1) and (3) are associated with: A. The shares of total resource income going to wages. Refer to the above diagram. D. AACSB: Analytical Skills Bloom's: Knowledge Learning Objective: 2-5 Topic: Circular flow model 100. C. the product market.Chapter 02 . rent. B. Refer to the above diagram.The Market System and the Circular Flow 99. D. AACSB: Analytical Skills Bloom's: Knowledge Learning Objective: 2-5 Topic: Circular flow model 101. consumer expenditures and income respectively. D. the resource market. B. magnifying the effect on the economy. AACSB: Reflective Thinking Skills Bloom's: Understanding Learning Objective: 2-5 Status: New Topic: Circular flow model 2-61 .

AACSB: Analytical Skills Bloom's: Knowledge Learning Objective: 2-1 Topic: Demise of the command systems 104. and uses the income she receives to buy food at the grocery store. D. Which of the following best illustrates the circular flow model in action? A. South Korea's command economy has significantly outperformed North Korea's market economy. Bobbie goes to work and builds cars. D. Evan buys a new couch.000. B. D. North Korea's command economy has significantly outperformed South Korea's market economy.Chapter 02 . AACSB: Analytical Skills Bloom's: Knowledge Learning Objective: 2-1 Status: New Topic: Demise of the command systems 2-62 . Boeing experiences a surge in orders for new airplanes. and uses the rest to take her family out to dinner. C. C. the owner of the furniture store uses some of the money from the sale to pay her supplier. B. North Korea's market economy has significantly outperformed South Korea's command economy. All of the above. has grown much faster than South Korea since the two countries were divided after World War II. has undergone significant market reforms and is now one of the fastest growing economies. produces a per capita GDP of nearly $25. B. AACSB: Reflective Thinking Skills Bloom's: Application Learning Objective: 2-5 Status: New Topic: Circular flow model 103. C. is one of the few remaining command economies.The Market System and the Circular Flow 102. North Korea's command economy: A. (Consider This) Since World War II: A. prompting the company to hire more workers. South Korea's market economy has significantly outperformed North Korea's command economy.

(Consider This) In 1975 McDonald's introduced its Egg McMuffin breakfast sandwich. D. which failed to catch on with the public and was subsequently dropped from the menu. the world's tens of billions of individual resources get arranged productively: A. specialization. which remains popular and profitable today. This longevity illustrates the idea of: A. This failure illustrates the idea of: A. (Last Word) According to economist Donald Boudreaux. opportunity cost. D.The Market System and the Circular Flow 105. C. D. B. through random trial and error. AACSB: Reflective Thinking Skills Bloom's: Application Learning Objective: 2-3 Topic: Five fundamental questions 107. because people tend to be creative and orderly. AACSB: Reflective Thinking Skills Bloom's: Application Learning Objective: 2-3 Topic: Five fundamental questions 106. B. C. downsloping demand.Chapter 02 . AACSB: Analytical Skills Bloom's: Understanding Learning Objective: 2-2 Topic: Characteristics of the market system 2-63 . consumer sovereignty. consumer sovereignty. B. upsloping supply. because government has become highly effective at central planning. specialization. technological change. C. because private property encourages people to consider the alternative uses of their resources and select those that provide the most rewards. (Consider This) In 1996 McDonald's introduced its Arch Deluxe hamburger.

the market system threatens to do irreparable harm to the world's ecosystem. B.Chapter 02 . TRUE AACSB: Analytical Skills Bloom's: Understanding Learning Objective: 2-2 Topic: Characteristics of the market system 111. Consumer sovereignty means that legislation now protects the rights of consumers to dispose of their incomes as they see fit. TRUE AACSB: Analytical Skills Bloom's: Understanding Learning Objective: 2-2 Topic: Characteristics of the market system 110.The Market System and the Circular Flow 108. Market economies use capital goods because they improve productive efficiency. Money functions as a medium of exchange by eliminating the need for a coincidence of wants. FALSE AACSB: Analytical Skills Bloom's: Knowledge Learning Objective: 2-3 Topic: Five fundamental questions 2-64 . private property eliminates the possibility that resource arrangements will be random. D. AACSB: Analytical Skills Bloom's: Understanding Learning Objective: 2-2 Topic: Characteristics of the market system True / False Questions 109. the market system works wondrously for advanced industrial nations but not for developing nations. (Last Word) According to economist Donald Boudreaux: A. arranging resources under the market system is much like shuffling a deck of cards. C.

Chapter 02 . Costs can be defined as total payments made to workers. Specialization may expand total output even though the individuals involved may have identical abilities. FALSE AACSB: Analytical Skills Bloom's: Knowledge Learning Objective: 2-3 Topic: Five fundamental questions 2-65 . Programs by state governments to keep milk prices higher than market-determined prices to protect family dairy farms from bankruptcy promote the efficient allocation of resources. land owners. TRUE AACSB: Analytical Skills Bloom's: Knowledge Learning Objective: 2-3 Topic: Five fundamental questions 115. TRUE AACSB: Analytical Skills Bloom's: Understanding Learning Objective: 2-2 Topic: Characteristics of the market system 114.The Market System and the Circular Flow 112. and capital suppliers less payments to the entrepreneur for organizing and combining the other resources used to produce a good. FALSE AACSB: Reflective Thinking Skills Bloom's: Application Learning Objective: 2-3 Topic: Characteristics of the market system 113. The wants of consumers are expressed in the product market with "dollar votes".

TRUE AACSB: Analytical Skills Bloom's: Understanding Learning Objective: 2-3 Topic: Five fundamental questions 117. The guiding function of prices tends to keep resources flowing toward their most highly valued uses. The invisible hand refers to the many indirect controls that the Federal government imposes in a market system. FALSE AACSB: Analytical Skills Bloom's: Understanding Learning Objective: 2-4 Topic: Invisible hand 119. TRUE AACSB: Analytical Skills Bloom's: Understanding Learning Objective: 2-4 Topic: Five fundamental questions 118.The Market System and the Circular Flow 116. Continued losses in an industry will cause some firms to reduce output or eventually leave the industry. 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.Chapter 02 . FALSE AACSB: Reflective Thinking Skills Bloom's: Knowledge Learning Objective: 2-1 Topic: Demise of the command systems 2-66 .

Chapter 02 . Central planning is plagued with a coordination problem and an incentive problem. TRUE AACSB: Reflective Thinking Skills Bloom's: Knowledge Learning Objective: 2-1 Topic: Demise of the command systems 2-67 .The Market System and the Circular Flow 120.