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Commerce and BusinessbackBusinessbackPrinciples of EconomicsbackEconomicsbackPractice Set 2495back

Market Failures And Government Intervention

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Question 1
Free
Multiple Choice

Which of the following roles of the government is most fundamental to a society's ability to function safely and carry on normal economic and social life?

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A

provider of health care

B

provider of education

C

provider of a justice system

D

holder of a monopoly of violence

E

regulator of free markets

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Question 2
Free
Multiple Choice

The concept of "institution building" is becoming more prominent.Which of the following best describes the aim of institution building?

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A

In Canada,for example,the strengthening of existing financial institutions is key to the country's economic well-being.

B

Canada's aid to developing countries is being focused on creating the economic institutions,such as a central bank,that are key to a country's economic growth.

C

The rich,developed countries focus their assistance to developing countries on creating stable political infrastructures.

D

The rich,developed countries focus on the success of institutions that are global in nature,such as the United Nations,The World Bank and the International Monetary Fund.

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Question 3
Free
Multiple Choice

Which of the following statements about free-market economies is false?

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A

An efficiently functioning market economy will correct temporary shortages and surpluses.

B

Markets tend to be impersonal and to decentralize economic power.

C

The government has a role to play in correcting market failures.

D

In a free-market economy there is no role for government intervention.

E

The existence of profits and losses provides signals to other economic agents.

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Question 4
Free
Multiple Choice

The essential coordinating mechanism of a free-market economy is

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A

allocative efficiency.

B

productive efficiency.

C

profit maximization.

D

the price system.

E

opportunity cost.

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Question 5
Free
Multiple Choice

The "formal defence" of free markets includes the argument that competitive markets

Choose correct answer/s
A

lead to allocative efficiency.

B

provide automatic coordination of the actions of decentralized decision makers.

C

provide a stimulus to innovation and economic growth because of the pursuit of profits.

D

permit a decentralization of economic power.

E

lead to political freedom.

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Question 6
Multiple Choice

The "informal defence" of free markets includes the argument that markets

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A
provide automatic coordination of the actions of decentralized decision makers.
B
achieve the maximum feasible rate of economic growth.
C
lead to allocative efficiency.
D
permit a centralization of economic power.
E
lead to productive efficiency.
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Question 7
Multiple Choice

Which of the following statements about market economies is true?

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A
Most present-day economists advocate extensive government intervention in most parts of market economies.
B
Externalities make free-market outcomes socially efficient.
C
An important characteristic of the market system is its ability to set in motion forces that tend to correct disequilibrium.
D
Market failure means that a market economy is incapable of satisfying human wants.
E
Pure market economies provide the best social outcome.
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Question 8
Multiple Choice

In a competitive market economy with no externalities,allocative efficiency would exist if

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A
prices equal total cost in all markets.
B
prices equal marginal revenue in all markets.
C
prices equal marginal costs in all markets.
D
prices equal average variable cost in all markets.
E
stringent government intervention exists.
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Question 9
Multiple Choice

Economic losses in an industry are a signal that

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A
too few resources are allocated to the industry.
B
all of the firms should leave the industry.
C
a government subsidy is necessary.
D
will lead resources to leave the industry (until the losses disappear).
E
the economy is in a recession.
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Question 10
Multiple Choice

If typical firms in a competitive industry are earning economic profits,the industry

Choose correct answer/s
A
is in a long-run equilibrium.
B
has too many resources allocated to it.
C
must be experiencing an increase in monopoly power.
D
can be expected to experience the entry of new firms.
E
is allocatively efficient.
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Question 11
Multiple Choice

Which of the following statements about the price system is most accurate? The price system

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A
is automatic and functions perfectly in reallocating economic resources.
B
is automatic,although it does not function perfectly.
C
depends on planned coordination between firms and governments.
D
operates only in a laissez-faire economy.
E
is the only feasible method of allocating resources.
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Question 12
Multiple Choice

Economists describe prices as "signals" in a market economy because

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A
prices are the only mechanism through which supply and demand will balance.
B
changes in these signals bring about changes in economic behaviour.
C
changes in these signals bring about changes in market structure.
D
they tell consumers how to act to keep the market system functioning well.
E
they tell government agents how to act to keep the market system functioning well.
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Question 13
Multiple Choice

One part of the "informal defence" of the market system is the argument,made forcefully by the late Milton Friedman,that free markets provide for the

Choose correct answer/s
A
greatest equality in income distribution.
B
decentralization of economic power.
C
greatest security for members of society.
D
government with the highest tax revenues.
E
greatest scope for international trade.
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Question 14
Multiple Choice

Profit-motivated product and process innovation is primarily a characteristic of ________ systems.

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A
market
B
centrally planned
C
oligopolistic
D
socialist
E
monopolistic
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Question 15
Multiple Choice

In a free-market economy,

Choose correct answer/s
A
temporary shortages and surpluses become permanent.
B
economic power is centralized.
C
market failures are automatically corrected.
D
there is no role for government intervention.
E
the existence of profits and losses provide signals to other economic agents.
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Question 16
Multiple Choice

When prices are determined in a free-market system

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A
changes in the economy can be foreseen by officials.
B
resources are allocated without conscious central coordination.
C
firms respond to changes in the economy mainly by altering the wage rate.
D
demand shifts,caused by price changes,coordinate all necessary changes in the economy.
E
supply shifts,caused by price changes,coordinate all necessary changes in the economy.
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Question 17
Multiple Choice

In a free-market economy that is continually adjusting toward equilibrium,a primary force driving this adjustment is

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A
opportunity costs.
B
diminishing returns.
C
the pursuit of allocative efficiency.
D
the scarcity of resources.
E
the pursuit of profits.
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Question 18
Multiple Choice

In a free-market system,a disequilibrium in one market

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A
provides evidence that the market system does not work.
B
shows that government intervention is always necessary to restore the market to equilibrium.
C
suggests that no seller or buyer has an incentive to alter his or her behaviour.
D
produces forces that eventually bring that market back to equilibrium.
E
means that the economy will fall into chaos.
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Question 19
Multiple Choice

Economists use the term "market failure" to refer to those free-market situations where

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A
income is not distributed equitably.
B
allocatively efficient outcomes are not achieved.
C
externalities are present in the economy.
D
the economy is not in equilibrium.
E
government has intervened in the economy.
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Question 20
Multiple Choice

A free-market economy with perfect allocative efficiency does not exist in reality because

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A
government intervention in the economy prevents the economic forces that would eventually bring the market to an allocatively efficient outcome.
B
the assumption of profit-maximization is not a realistic assumption about the behaviour of firms.
C
the assumption of utility maximization is not a realistic assumption about the behaviour of consumers.
D
firms in many industries have some degree of market power and face negatively sloped demand curves,and produce a level of output where P > MC.
E
the decentralization of economic power in a free-market economy does not allow for allocative efficiency.
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