Question 1

Explain how the free-market mechanism adjusts prices so that resource allocation is economically efficient.

Accepted Answer

Firms are induced to buy and use inputs

Question 2

When all prices are set equal to marginal costs,

Accepted Answer

A) consumers buy more than they should. 
B) consumers will get less utility. 
C) markets are giving correct signals to consumers. 
D) producers make excessive profits. 
A) consumers buy more than they should. 
B) consumers will get less utility. 
C) markets are giving correct signals to consumers. 
D) producers make excessive profits.

Question 3

In a laissez-faire system, the price mechanism dictates the production planning decisions.

Accepted Answer

A) True 
 B)False

Question 4

Government-imposed limits on price movements are likely to

Accepted Answer

A) increase economic efficiency. 
B) decrease economic efficiency. 
C) leave economic efficiency unchanged. 
D) promote economic growth in the economy. 
A) increase economic efficiency. 
B) decrease economic efficiency. 
C) leave economic efficiency unchanged. 
D) promote economic growth in the economy.

Question 5

Distribution is a major question to be answered by any economic system.

Accepted Answer

A) True 
 B)False

Question 6

When the invisible hand is at work,

Accepted Answer

A) the price system will sometimes give incorrect cost signals to consumers. 
B) the price system will allocate resources based only on consumer need. 
C) all prices will be set equal to marginal costs. 
D) there will be some shortages and surpluses that cannot be avoided. 
A) the price system will sometimes give incorrect cost signals to consumers. 
B) the price system will allocate resources based only on consumer need. 
C) all prices will be set equal to marginal costs. 
D) there will be some shortages and surpluses that cannot be avoided.

Question 7

The price system is sometimes criticized in that it

Accepted Answer

A) leads to greater efficiency. 
B) results in allowing the rich get a disproportionate say in what goods and services are produced. 
C) coordinates activities without the need for planning by government agencies. 
D) relies too heavily on input-output analysis. 
A) leads to greater efficiency. 
B) results in allowing the rich get a disproportionate say in what goods and services are produced. 
C) coordinates activities without the need for planning by government agencies. 
D) relies too heavily on input-output analysis.

Question 8

When an economy operates efficiently,

Accepted Answer

A) the MRPs of every input into the production of a good are equal. 
B) marginal utility equals marginal cost for every good. 
C) the price of a good equals the sum of the marginal physical products of its inputs. 
D) All of the responses are correct. 
A) the MRPs of every input into the production of a good are equal. 
B) marginal utility equals marginal cost for every good. 
C) the price of a good equals the sum of the marginal physical products of its inputs. 
D) All of the responses are correct.

Question 9

To be efficient, outputs should be produced that minimize total cost.

Accepted Answer

A) True 
 B)False

Question 10

Under a pure system of laissez-faire, the government would not do which of the following?

Accepted Answer

A) Prosecute criminals 
B) Provide national defense 
C) Punish those involved in conspiracies to fix prices 
D) Establish minimum wages 
A) Prosecute criminals 
B) Provide national defense 
C) Punish those involved in conspiracies to fix prices 
D) Establish minimum wages

Question 11

Input-output analysis is a technique used to solve complicated market equations.

Accepted Answer

A) True 
 B)False

Question 12

Mutually beneficial trade is impossible when different persons have different preferences about goods and services.

Accepted Answer

A) True 
 B)False

Question 13

When an economy is operating with maximum efficiency, the production of more of commodity A will entail the production of less of commodity B because

Accepted Answer

A) resources are specialized and cannot be easily reallocated. 
B) resources are limited. 
C) the structure of demand is fixed at any point in time. 
D) material wants are insatiable. 
A) resources are specialized and cannot be easily reallocated. 
B) resources are limited. 
C) the structure of demand is fixed at any point in time. 
D) material wants are insatiable.

Question 14

Laissez-faire is a policy that espouses central planning.

Accepted Answer

A) True 
 B)False

Question 15

What is the order in which an economy tries to solve the issue of resource allocation?

Accepted Answer

A) Production planning, distribution, and output selection 
B) Output selection, production planning, and distribution 
C) Production planning, output selection, and distribution 
D) Distribution, production planning, and output selection 
A) Production planning, distribution, and output selection 
B) Output selection, production planning, and distribution 
C) Production planning, output selection, and distribution 
D) Distribution, production planning, and output selection

Question 16

The price system automatically leads to an efficient allocation of inputs among the different production processes.

Accepted Answer

A) True 
 B)False

Question 17

Differentiate between consumer's surplus and producer's surplus.For a rational consumer, consumer's surplus will never be a negative number.Why?

Accepted Answer

The consumer's surplus from a purchase i

Question 18

Figure 11-2
​  
-As we move down the production possibilities schedule in Figure 11-2, each successive point is

Accepted Answer

A) less efficient. 
B) more efficient. 
C) equally efficient. 
D) more or less efficient; we cannot tell which. 
A) less efficient. 
B) more efficient. 
C) equally efficient. 
D) more or less efficient; we cannot tell which.

Question 19

When the price of a good is below its equilibrium level under perfect competition,

Accepted Answer

A) consumers would benefit from an expansion of output. 
B) some consumers are earning larger consumer's surpluses than they would in equilibrium. 
C) the market is not operating at maximum efficiency. 
D) All of the responses are correct. 
A) consumers would benefit from an expansion of output. 
B) some consumers are earning larger consumer's surpluses than they would in equilibrium. 
C) the market is not operating at maximum efficiency. 
D) All of the responses are correct.

Question 20

The MU of computers is initially larger than the MC of producing them in a free market.We may expect output of computers to

Accepted Answer

A) fall, MC to rise, and MU to rise. 
B) rise, MC to fall, and MU to fall. 
C) rise, MC to rise, and MU to fall. 
D) fall, MC to fall, and MU to rise. 
A) fall, MC to rise, and MU to rise. 
B) rise, MC to fall, and MU to fall. 
C) rise, MC to rise, and MU to fall. 
D) fall, MC to fall, and MU to rise.

Exam 11: The Case for Free Markets: the Price System

Explain how the free-market mechanism adjusts prices so that resource allocation is economically efficient.

When all prices are set equal to marginal costs,

In a laissez-faire system, the price mechanism dictates the production planning decisions.

Government-imposed limits on price movements are likely to

Distribution is a major question to be answered by any economic system.

When the invisible hand is at work,

The price system is sometimes criticized in that it

When an economy operates efficiently,

To be efficient, outputs should be produced that minimize total cost.

Under a pure system of laissez-faire, the government would not do which of the following?

Input-output analysis is a technique used to solve complicated market equations.

Mutually beneficial trade is impossible when different persons have different preferences about goods and services.

When an economy is operating with maximum efficiency, the production of more of commodity A will entail the production of less of commodity B because

Laissez-faire is a policy that espouses central planning.

What is the order in which an economy tries to solve the issue of resource allocation?

The price system automatically leads to an efficient allocation of inputs among the different production processes.

Differentiate between consumer's surplus and producer's surplus.For a rational consumer, consumer's surplus will never be a negative number.Why?

Figure 11-2 ​ -As we move down the production possibilities schedule in Figure 11-2, each successive point is

When the price of a good is below its equilibrium level under perfect competition,

The MU of computers is initially larger than the MC of producing them in a free market.We may expect output of computers to

What Is Economics

The Economony: Myth and Reality

The Fundamental Economic Problem: Scarcity and Choice

Supply and Demand: an Initial Look

Consumer Choice: Individual and Market Demand

Demand and Elasticity

Production, Inputs, and Cost: Building Blocks for Supply Analysis

Output, Price, and Profit: the Importance of Marginal Analysis

The Financial Markets and the Economy: the Tail That Wags the Dog

The Firm and the Industry Under Perfect Competition

Monopoly

Between Competition and Monopoly

Limiting Market Power: Antitrust and Regulation

The Shortcomings of Free Markets

The Economics of the Environment, and Natural Resources

Taxation and Resource Allocation

Pricing the Factors of Production

Labor and Entrepreneurship: the Human Inputs

Poverty, Inequality, and Discrimination

An Introduction to Macroeconomics

The Goals of Macroeconomic Policy

Economic Growth: Theory and Policy

Aggregate Demand and the Powerful Consumer

Demand-Side Equilibrium: Unemployment or Inflation

Bringing in the Supply Side: Unemployment and Inflation

Managing Aggregate Demand: Fiscal Policy

Money and the Banking System

Monetary Policy: Conventional and Unconventional

The Financial Crisis and the Great Recession

The Debate Over Monetary and Fiscal Policy

Budget Deficits in the Short and Long Run

The Trade-Off Between Inflation and Unemployment

International Trade and Comparative Advantage

The International Monetary System: Order or Disorder

Exchange Rates and the Macroeconomy

Contemporary Issues in the Useconomy

Filters

Figure 11-2 -As we move down the production possibilities schedule in Figure 11-2, each successive point is