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Chapter 2
How a Market Economy Works:
The Price System
T Multiple Choice Questions
Choose the one alternative that best completes the statement or answers the question.
1.
Virtual Markets
(a) are fictitious markets using personal computers in cyberspace.
(b) are fictitious markets using cell phones in cyberspace.
(c) allow transactions between fictitious buyers and sellers in cyberspace.
(d) allow transactions via personal computers in cyberspace.
(e) allow highly perishable, nontransportable items to trade in local markets.
Answer: D
2.
Markets
(a) require large numbers of buyers and sellers.
(b) exist in cities and not in local communities.
(c) for labor, typically are defined by a reasonable commuting distance to work.
(d) do not exist for rare antiquities.
(e) All of the above.
Answer: C
3.
All of the following are forms of business except
(a) corporations.
(b) partner proprietorships.
(c) general partnerships.
(d) sole proprietorships.
(e) All of the above are forms of business.
Answer: B
4.
A corporation
(a) is owned by its Board of Directors.
(b) acts by law as a legal person.
(c) holds shareholders personally liable for corporate debts.
(d) requires day to day participation by its owners.
(e) All of the above.
Answer: B
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Gregory • Essentials of Economics, Sixth Edition
5.
There are approximately
(a) 12 million corporations in the U.S.
(b) 20 million corporations in the U.S.
(c) $12 trillion worth of business revenues in the U.S.
(d) 2 million sole proprietorships in the U.S.
(e) 1 million sole proprietorships in the U.S.
Answer: C
6.
The legal system protects the owners of property rights from all of the following except
(a) use by a government.
(b) unlawful damage.
(c) theft.
(d) restriction on the use of the property.
(e) sale of the property.
Answer: A
7.
The legal system of property rights
(a) may restrict the use of private property.
(b) may restrict the dumping of toxic waste.
(c) may require shops to close in residential areas.
(d) may include deed restrictions and zoning laws.
(e) includes all of the above.
Answer: E
8.
Laissez-faire
(a) is contrary to the invisible hand concept.
(b) means allowing the government to produce goods and services.
(c) means allowing the government to maintain a legal system.
(d) is contrary to individuals providing goods and services.
(e) means none of the above.
Answer: C
9.
Public goods are characterized by
(a) more consumption affecting other consumers’ consumption.
(b) less consumption affecting other consumers’ consumption.
(c) payers being excluded from use of the product.
(d) nonpayers being excluded from use of the product.
(e) None of the above.
Answer: E
10.
Which of the following is correct? Public goods
(a) will be provided by the invisible hand, according to Adam Smith.
(b) are the result of a single seller having considerable control over the price.
(c) will be paid for voluntarily by users.
(d) are allocated in markets by supply and demand.
(e) are not provided for by the price system.
Answer: E
Chapter 2
How a Market Economy Works: The Price System
11.
Adam Smith said that people
(a) use their capital so that its product is of least cost.
(b) always intend to promote the public interest.
(c) generally intend only their own gain.
(d) frequently promote the interest of society less effectively through their self interest.
(e) All of the above.
Answer: C
12.
The circular-flow diagram illustrates
(a) the interdependence of economic activity.
(b) how the income of consumers is linked to their own spending in the aggregate.
(c) how dollar movements flow in the opposite direction of good or resource movements.
(d) that the resources furnished to business firms come from consumers.
(e) All of the above.
Answer: E
13.
The price system may not work well because
(a) of internal costs.
(b) of the existence of monopolies.
(c) it promotes an equal distribution of income.
(d) of its ability to produce public goods.
(e) All of the above.
Answer: B
14.
The major disadvantage of barter is that
(a) it allows for specialization of producers.
(b) property rights can not be established under a barter system.
(c) interest for holding “money” can not be readily computed.
(d) it is highly inefficient as a method of exchange.
(e) households would find it difficult to spend all their income.
Answer: D
15.
The basic insight of Adam Smith was that
(a) the economic actions of self-interested people promote the social interest.
(b) democracy is the only form of government compatible with capitalism.
(c) government regulation could work hand-in-hand with the market.
(d) there is a fundamental conflict between self-interest and the social good.
(e) an invisible hand was required to direct market outcomes.
Answer: A
16.
Shortages and surpluses vanish when the invisible hand
(a) uses its monopoly power.
(b) sets equilibrium prices.
(c) uses price controls.
(d) uses the government to allocate goods and services.
(e) None of the above.
Answer: B
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Gregory • Essentials of Economics, Sixth Edition
17.
When practically no good is irreplaceable in meeting demand, the concept is called
(a) the law of opportunity costs.
(b) the principle of substitution.
(c) the law of increasing cost.
(d) inflation.
(e) the law of diminishing returns.
Answer: B
18.
If milk costs $4 a gallon (one gallon equals 4 quarts) and bread costs $1 a loaf, the relative price of
milk is
(a) 4 gallons of milk.
(b) 4 loaves of bread.
(c) 1 quart of milk.
(d) 1 gallon of milk.
(e) None of the above.
Answer: B
19.
Which of the following is true? Money
(a) does not increase efficiency.
(b) is used only in advanced economies.
(c) is not necessary because of specialization.
(d) reduces the cost of transacting with others.
(e) All of the above.
Answer: D
20.
If the price of a new car rises from $5,000 to $10,000 while on the average, other prices double, then
the relative price of a new car
(a) increases by double.
(b) decreases by double.
(c) stays constant.
(d) rises 50 percent.
(e) falls by 50 percent.
Answer: C
21.
People search out substitutes for a good when its
(a) relative price rises.
(b) money price rises.
(c) relative price falls.
(d) money price falls.
(e) its money price rises and its relative price falls.
Answer: A
Chapter 2
How a Market Economy Works: The Price System
22.
Economic transactions that show up in the circular flow are
(a) transactions that take place within a particular business.
(b) transactions that take place among business firms.
(c) transactions that take place among members of a family.
(d) the sale of steel to General Motors.
(e) All of the above.
Answer: E
23.
In a market economy the what, how and for whom questions are answered when
(a) supplies for goods are matched with demands at the appropriate price in the marketplace.
(b) firms set price and then adjust supply to meet demand.
(c) households set price and then adjust demand to meet supply.
(d) goods and services are demanded by the rich.
(e) households sell labor services to business firms.
Answer: A
24.
No one person needs to know how to make a pencil in its entirety because of
(a) the invisible hand.
(b) equilibrium prices.
(c) the coordination of supply and demand through the price system.
(d) specialization.
(e) All of the above.
Answer: E
25.
The principle of substitution states that
(a) luxuries but not necessities have substitutes.
(b) necessities but not luxuries have substitutes.
(c) there is no substitute for efficiency.
(d) almost everything has substitutes.
(e) most goods have relatively few substitutes.
Answer: D
26.
Adam Smith’s invisible hand
(a) refers to the unseen hand of government in everybody’s pocket.
(b) refers to the invisible role of monopolies.
(c) refers to the social costs of the unseen or invisible workings of private selfishness.
(d) refers to the invisible hand of Providence in solving the economic problems of society.
(e) refers to the social benefits of the unseen workings of self-interest and the price system.
Answer: E
27.
The circular-flow diagram illustrates
(a) the flows of goods and services among business firms.
(b) the flows of goods and services between government and households.
(c) the flows of goods and services between businesses and households.
(d) the flows of real goods and services, not monetary flows.
(e) the flows of intermediate goods between businesses.
Answer: C
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Gregory • Essentials of Economics, Sixth Edition
28.
Adam Smith’s metaphor of the “invisible hand” was meant to illustrate
(a) the circular flow of economic life.
(b) the law of comparative advantage.
(c) the principle of substitution.
(d) the ups and downs of the business cycle.
(e) why the pursuit of self-interest could serve social ends.
Answer: E
29.
Money prices are most important in the study of
(a) microeconomics.
(b) choice.
(c) macroeconomics.
(d) the law of demand.
(e) opportunity costs.
Answer: C
30.
Society may find the price system inadequate in the instance of
(a) external costs and benefits.
(b) monopoly.
(c) income distribution.
(d) public goods.
(e) All of the above.
Answer: E
31.
The price system does not always function well in the provision of public goods, such as national
defense. One explanation for this failure is because
(a) it is easy to determine the benefits of public goods.
(b) one of the three basic questions of economics is not involved.
(c) it is difficult to prevent nonpayers from enjoying the benefits of the public good.
(d) the supply of public goods typically exceeds their demand.
(e) there are difficult tradeoffs in the production of public goods.
Answer: C
32.
In 1963, a typical car cost about $2,000 and in 1987, a similar car cost about $12,000. On average,
what cost $100 in 1963 could be purchased in 1987 for about $375. The relative price of a car
(a) decreased from 1963 to 1987.
(b) was roughly the same in 1987 as in 1963.
(c) increased from 1963 to 1987.
(d) exactly doubled in price from 1963 to 1987.
(e) may have risen or fallen; too little information is available to assess changes in relative price.
Answer: C
Chapter 2
How a Market Economy Works: The Price System
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33.
In 1970, an average 25-inch TV set sold for $300, while in 1989, a similar TV set sold for about
$600. On average, consumer buying power of $100 in 1970 could buy about $700 of goods and
services in 1989. The relative price of a TV set
(a) decreased from 1970 to 1989.
(b) was roughly the same in 1970 and 1989.
(c) increased from 1970 to 1989.
(d) exactly doubled in price from 1970 and 1989.
(e) may have risen or fallen; too little information is available to assess changes in relative price.
Answer: A
34.
In 1990, computer diskettes were about $10 per box and were only $6 per box 2 years later. The
average bundle of goods purchased in 1990 was worth $1000/month and by 1992, it had decreased
to $850. The relative price of computer diskettes
(a) decreased from 1990 to 1992.
(b) decreased by half from 1990 to 1992.
(c) was roughly the same in 1990 and 1992.
(d) increased from 1990 to 1992.
(e) may have risen or fallen; too little information is available to assess changes in relative price.
Answer: A
35.
In 1989, mortgage payments on a typical home were about $600 per month; by 1992, the same
mortgage payment had fallen to $540. The average bundle of goods and services that cost $1100 in
1989 had fallen to $900 by 1992. The relative price of mortgage payments
(a) decreased from 1989 to 1992.
(b) decreased by half from 1989 to 1992.
(c) was roughly the same in 1989 and 1992.
(d) increased from 1989 to 1992.
(e) may have risen or fallen; too little information is available to assess changes in relative price.
Answer: C