Chapter 1 part 3
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Questions and Answers

In an economy in which decisions are guided by prices and individual self-interest, there is

  • the potential to achieve efficiency in production. (correct)
  • a strong need for government intervention in the market.
  • less efficiency than would be observed in a centrally-planned economy.
  • more need for a strong legal system to control individual greed than would be needed in a centrally-planned economy.

Prices direct economic activity in a market economy by

  • influencing the actions of buyers and sellers. (correct)
  • reducing scarcity of the goods and services produced.
  • eliminating the need for government intervention.
  • allocating goods and services in the most equitable way.

Which of the following firms is most likely to have market power?

  • a fast food restaurant in a college town
  • a wheat farm in Kansas
  • the last gas station in New Mexico for 100 miles (correct)
  • a shoe store in Kentucky

The "invisible hand" directs economic activity through

<p>prices. (B)</p> Signup and view all the answers

The invisible hand's ability to coordinate the decisions of the firms and households in the economy can be hindered by

<p>government actions that distort prices. (A)</p> Signup and view all the answers

A primary function of prices in a market economy is to provide participants with

<p>relevant economic information. (A)</p> Signup and view all the answers

When the government prevents prices from adjusting naturally to supply and demand,

<p>it adversely affects the allocation of resources. (B)</p> Signup and view all the answers

A company that formerly produced software went out of business because too many potential customers bought illegally-produced copies of the software instead of buying the product directly from the company. This instance serves as an example of

<p>inadequate enforcement of property rights. (C)</p> Signup and view all the answers

A rationale for government involvement in a market economy is as follows:

<p>All of the above are correct. (D)</p> Signup and view all the answers

Which of the following statements is not true?

<p>In the presence of a market failure, government action will always improve on the market outcome. (A)</p> Signup and view all the answers

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