Question 1

What is a market economy and why is it essential that government play a role in such an economy?

Accepted Answer

A market economy is an economic system based on private property and the market in which, individuals decide how, what, and for whom to produce. Government plays an essential role in such an economy because it must allocate and defend private property rights. If people do not respect private property, those who take property from others eliminate the incentive for people to acquire and accumulate private property. Without this incentive, there will be no production and the economic system will collapse into anarchy.

Question 2

What is the central tool of coordination in a market economy?

Accepted Answer

The central tool of coordination in a market economy is the market (i.e., price adjustments).

Question 3

How does the factor market differ from the goods market?

Accepted Answer

In the factor market, households supply all factors of production to business, and that includes labor, land, capital, and managerial skills. In the goods market, business supply finished goods and services to households.

Question 4

Briefly explain how the U.S. economic system has evolved from the early 1900s to today.

Accepted Answer

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Question 5

Briefly explain why socialist economic systems thwarted market forces.

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Question 6

Define a market economy.

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Question 7

The three primary forms of business are sole proprietorships, partnerships, and corporations. You are contemplating starting a business. For each of the following proposals, explain which of the three types of businesses would be most appropriate. In each case describe the advantages and disadvantages of your choice.
(a) You love drones and want to start a business creating drone pictures of people's houses and property.
(b) After a late night cram session, you and your roommate are in need of some pizza, but no restaurants are open. You decide to open an all night pizza parlor.
(c) You have an idea that will make you a billionaire before you graduate from college: a pizza delivery service - from any restaurant to any dorm. In order to make your revenue goal a reality, a local venture capital firm has informed you that you will need to nationally franchise your operation.

Accepted Answer

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Question 8

Which economic system depends primarily on tradition to answer the "What to produce?" question? Which economic system depends on government planners to make that decision? Which economic system depends on the market to make that decision?

Accepted Answer

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Question 9

How does theoretical socialism differ from theoretical capitalism? How does it differ from socialism as it was practiced? Why are these terms no longer useful in describing today's economic systems?

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Question 10

The U.S. economy may be thought of as consisting of three large groups. What are they? How does each group interact with the others? How does the factor market differ from the goods market? What major aspect of a modern market economy is omitted from this picture?

Accepted Answer

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Question 11

There are three primary forms of businesses in the United States. List them and provide an example of each form.

Accepted Answer

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Question 12

What are the six major roles that the government plays in the economy? Give an example of each.

Accepted Answer

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Question 13

How does socialism as it was practiced differ from socialism in theory?

Accepted Answer

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Question 14

Define consumer sovereignty. How does consumer sovereignty help determine what businesses produce? How do businesses influence consumer sovereignty?

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Question 15

List four ways in which the decisions of households are important to the economy.

Accepted Answer

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Question 16

If a market economy is to succeed by relying on private property rights and market forces, there is an essential role for government to play in the economic system. What is it? And explain why it is essential.

Accepted Answer

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Question 17

Briefly explain the difference between socialism and capitalism.

Accepted Answer

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Question 18

List the advantages and disadvantages of the three primary forms of business in the United States.

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Question 19

How do global economic issues differ from national policy issues? How has the international economic community dealt with this difference?

Accepted Answer

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Exam 3: Economic Institutions