McGraw-Hill Ryerson

Chapter 3. Overview of the Market System


1. Which is one of the main features of pure capitalism?
A. central economic planning
B. limits on freedom of choice
C. the right to own private property
D. an expanded role for government in the economy



2. In pure capitalism, freedom of enterprise means that
A. businesses are free to produce products that consumers want
B. consumers are free to buy goods and services that they want
C. resources are distributed freely to businesses that want them
D. government is free to direct the actions of businesses



3. The maximization of profit tends to be the driving force in the economic decision making of
A. entrepreneurs
B. workers
C. consumers
D. legislators



4. How do consumers typically express self-interest?
A. by minimizing their economic losses
B. by maximizing their economic profits
C. by seeking the lowest price for a product
D. by seeking jobs with the highest wages and benefits



5. Which of the following is a characteristic of competition as the economist sees it?
A. the widespread diffusion of economic power
B. a small number of buyers in product markets
C. several sellers of all products
D. the relatively difficult entry into and exit from industries by producers



6. To decide how to use its scarce resources to satisfy human wants pure capitalism relies on
A. central planning
B. roundabout production
C. markets and prices
D. barter



7. In pure capitalism, the role of government is best described as
A. nonexistent
B. limited
C. significant
D. extensive



8. What is roundabout production?
A. the division of labor that results from specialization in the production of a good or service
B. the production and use of capital goods to help make consumer goods
C. the production of a good and service and the payment for it with money
D. the production of a consumer good and its sale to consumers



9. In an economy that possesses full employment and full production, constant amounts of resources, and unchanging technology,
A. increasing the production of capital goods requires an increase in the production of consumer goods
B. decreasing the production of capital goods necessitates a decrease in the production of consumer goods
C. increasing the production of capital goods is impossible
D. increasing the production of capital goods requires a decrease in the production of consumer goods



10. When workers specialize in various tasks to produce a commodity, the situation is referred to as
A. double coincidence of wants
B. roundabout production
C. freedom of choice
D. division of labor



11. Which is a prerequisite of specialization?
A. having a convenient means of exchanging goods
B. letting government create a plan for the economy
C. business firms making an economic profit
D. business firms making a normal profit



12. The competitive market system is a method of
A. communicating and synchronizing the decisions of consumers, producers, and resource suppliers
B. centrally planning economic decisions
C. promoting productive efficiency, but not allocative efficiency
D. promoting allocative efficiency, but not productive efficiency



13. Which of the following best defines economic costs?
A. total payments made to workers, landowners, suppliers of capital, and entrepreneurs
B. only total payments made to workers, landowners, suppliers of capital, and entrepreneurs which must be paid to obtain the services of their resources
C. total payments made to workers, landowners, suppliers of capital, and entrepreneurs less normal profits
D. total payments made to workers, landowners, suppliers of capital, and entrepreneurs plus normal profits



14. If a business' total economic cost of producing 10,000 units of a product is $750,000 and this output is sold to consumers for $1,000,000, then the firm would earn
A. a normal profit of $750,000
B. an economic profit of $750,000
C. an economic profit of $250,000
D. a normal profit of $1,750,000



15. If less-than-normal profits are being earned by the firms in an industry, the consequences will be that
A. lower-priced resources will be drawn into the industry
B. firms will leave the industry, causing the price of the industry's product to fall
C. firms will leave the industry, causing the price of the industry's product to rise
D. the price of the industry's product will fall and thereby cause the demand for the product to increase



16. Which of the following would necessarily result, sooner or later, from a decrease in consumer demand for a product?
A. a decrease in the profits of firms in the industry
B. an increase in the output of the industry
C. an increase in the supply of the product
D. an increase in the prices of resources employed by the firms in the industry



17. The demand for resources is
A. increased when the price of resources falls
B. most influenced by the size of government in a capitalist economy
C. derived from the demand for the products made with the resources
D. decreased when the product that the resources produce becomes popular



18.

Suppose 50 units of product X can be produced by employing just labour and capital in the four ways shown below. Assume
the prices of labour and capital are $5 and $4, respectively.
R-1 4a

Which technique is economically most efficient in producing product X?

A. A
B. B
C. C
D. D



19.

Suppose 50 units of product X can be produced by employing just labour and capital in the four ways shown below. Assume
the prices of labour and capital are $5 and $4, respectively.
R-1 4a

If the price of product X is $1, the firm will realize

A. an economic profit of $28
B. an economic profit of $27
C. an economic profit of $26
D. an economic profit of $25



20.

Suppose 50 units of product X can be produced by employing just labour and capital in the four ways shown below. Assume
the prices of labour and capital are $5 and $4, respectively.
R-1 4a

Now assume that the price of labour falls to $3 and the price of capital rises to $5. Which technique is economically most efficient in producing product X?

A. A
B. B
C. C
D. D



21. Which is the primary factor determining the share of the total output of the economy received by a household?
A. the tastes of the household
B. the medium of exchange used by the household
C. the prices at which the household sells its resources
D. ethical considerations in the operation of a market economy.



22. If an increase in the demand for a product and the resulting rise in the price of the product cause the quantity of the product supplied, the size of the industry producing the product, and the amounts of resources devoted to the production of the product to expand, price is successfully performing its
A. guiding function
B. rationing function
C. medium-of-exchange function
D. standard-of-value function



23. In a capitalist economy characterized by competition, if one firm introduces a new and better method of production, other firms will be forced to adopt the improved technique
A. to avoid less-than-normal profits
B. to obtain economic profits
C. to prevent the price of the product from falling
D. to prevent the price of the product from rising



24. Which of the following would be an indication that competition does not exist in an industry?
A. less-than-normal profits in the industry
B. inability of the firms in the industry to expand
C. inability of firms to enter the industry
D. wages are lower than the average wage in the economy



25. The chief economic virtue of the competitive market system is that it
A. allows extensive personal freedom
B. efficiently allocates resources
C. provides an equitable distribution of income
D. eliminates the need for decision making




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