STUDY GUIDE for Chapter 4

The Market System



         1.    The pursuit of self-interest:

                A)   is highly detrimental to the market system.

                B)    means the same as "selfishness."

                C)    is reflected in the behavior of firms, but not in the behavior of consumers.

                D)   gives direction to the market system.



         2.    Broadly defined, competition involves:

                A)   private property and freedom of expression.

                B)    independently acting buyers and sellers and freedom to enter or leave markets.

                C)    increasing opportunity costs and diminishing marginal utility.

                D)   capital goods and division of labor.



         3.    The use of money contributes to economic efficiency because:

                A)   governmental direction of the production and distribution of output can be avoided by using money.

                B)    "roundabout production" could not occur without the availability of money.

                C)    it is necessary for the creation of capital goods.

                D)   it promotes specialization by overcoming the problems with barter.



         4.    From society's point of view the economic function of profits and losses is to:

                A)   promote the equal distribution of real assets and wealth.

                B)    achieve full employment and price level stability.

                C)    contribute to a more equal distribution of income.

                D)   reallocate resources from less desired to more desired uses.



         5.    The market system's answer to the fundamental question "What will be produced?" is essentially:

                A)   "Goods and services that are profitable."

                B)    "Low cost goods and services."

                C)    "Goods and service that can be produced using round-about production."

                D)   "Goods and services that possess lasting value."



         6.    The advent of the digital video disk (DVDs) threatens to eventually demolish the market for videocassettes.  This is an example of:

                A)   creative destruction.

                B)    derived demand.

                C)    capital accumulation.

                D)   the difference between normal and economic profits.



         7.    "The 'dollar votes' of consumers ultimately determine the composition of output and the allocation of resources in a market economy." This statement best describes the concept of:

                A)   derived demand.

                B)    consumer sovereignty.

                C)    the invisible hand.

                D)   market failure.



         8.    Which of the following best describes the "invisible hand" concept?

                A)   The desires of resource suppliers and producers to further their own self-interest will automatically further the public interest.

                B)    The nonsubstitutability of resources creates a conflict between private and public interests and calls for government intervention.

                C)    The market system is the best system for overcoming the scarce resources-unlimited wants problem.

                D)   Central direction by the government will improve resource allocation in a capitalistic economy.



         9.    The "invisible hand" concept suggests that:

                A)   changes in product demands are only randomly reflected in changes in the demands for resources.

                B)    profit maximization is inconsistent with an efficient allocation of resources.

                C)    government action is necessary to correct for market failures.

                D)   when firms maximize their profits, society's output will also be maximized.



       10.    Two major virtues of the market system are that it:

                A)   allocates resources efficiently and allows economic freedom.

                B)    results in an equitable personal distribution of income and always maintains full employment.

                C)    results in price level stability and a fair personal distribution of income.

                D)   eliminates discrimination and minimizes environmental pollution.




Answer Key -- SG4


         1.    D            

         2.    B            

         3.    D            

         4.    D            

         5.    A            

         6.    A            

         7.    B            

         8.    A            

         9.    D            

       10.    A