Resource Allocation in a Free Market 1

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Question 1/10

1976

A sudden increase in the market price of avocados signals to farmers that

consumers now want more avocados relative to the quantity currently being supplied. the government has imposed a subsidy on avocado producers. consumers now place a lower value on avocados. production costs for avocados have risen. avocados are now an inferior good.

Question 2/10

1977

Which one of the following is a limitation of a market economy?

The distribution of goods and services depends on consumers' ability to pay, not on their need. Public goods are automatically provided in sufficient quantity by private firms. Monopolies never emerge in a market economy. Firms always take full account of the external costs their production imposes on third parties. Prices are always set to reflect the long-run average cost of production.

Question 3/10

1978

Which one of the following is a valid criticism of leaving resource allocation entirely to the market?

Firms in a market economy always produce at the allocatively efficient level of output. Government intervention is unnecessary in a market economy because markets never fail. Wages in a market economy are always set according to a worker's need, not their productivity. Consumers always have full and perfect information about the goods they buy. A market economy provides no guarantee that merit goods will be consumed in the socially optimal quantity.

Question 4/10

1979

Which one of the following statements about a market economy is correct?

A market economy guarantees that all firms earn only normal profit in the long run. Resources in a market economy are allocated purely on the basis of price signals from consumers and producers. A market economy automatically achieves a fair distribution of income across the population. A market economy eliminates the need for property rights to function. Negative externalities are always reflected in the market price of a good.

Question 5/10

1980

Which one of the following explains why a market economy may fail to allocate resources efficiently?

Firms with monopoly power may restrict output below the socially efficient level to maximise profit. The price mechanism guarantees an equal distribution of scarce resources among consumers. Consumers in a market economy have no influence over what is produced. Perfect competition is the norm in most real-world markets. A market economy always results in full employment of all resources.

Question 6/10

1981

Which one of the following is an advantage of a market economy?

Firms in a market economy have an incentive to respond quickly to changes in consumer demand. All goods produced in a market economy are excludable and rivalrous in consumption. A market economy always leads to a stable rate of inflation. A market economy removes the problem of scarcity entirely. A market economy will always under-produce private goods relative to the socially optimal quantity.

Question 7/10

1982

In a market economy, which one of the following best describes the main role of firms?

To regulate the activities of other firms. To set minimum wages for all workers. To combine factors of production to supply goods and services that consumers demand. To maximise employment in the economy. To ensure a fair distribution of income.

Question 8/10

1983

Which one of the following is most likely to be a role of government in a mixed economy?

Providing public goods that the private sector would otherwise under-provide. Preventing consumers from making their own spending choices. Directly setting the price of every good and service sold. Eliminating all competition between firms. Guaranteeing that every firm earns a profit.

Question 9/10

1984

In a market economy, what is the main economic role of households?

To set interest rates in the economy. To provide public goods to the rest of the economy. To regulate the behaviour of firms. To set the market price of goods and services. To supply factors of production, and to demand goods and services using the income generated.

Question 10/10

1985

Which one of the following is an example of government intervening to correct market failure?

Correcting market failure, for example by taxing goods that generate negative externalities. Preventing any firm from making a profit. Setting the price of every good sold in the private sector. Fixing wages in every industry. Producing all goods and services consumed in the economy.