Chapter The Price System and the Case for Free Markets
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1. The phrase "invisible hand" refers to:
a. the commands that government gives to firms.
b. the division between the private and public sectors in an economy.
c. the process through which prices and self-interest reconcile the interests of buyers and sellers in a market.
d. the circular flow of income.

2. An efficient allocation of resources is demonstrated by a point
a. above the production possibilities frontier.
b. below the production possibilities frontier.
c. on the production possibilities frontier.
d. near the middle of the production possibilities frontier.

3. An efficient allocation of resources exists if
a. one group of people can get more of the things they want without someone else having to give up anything.
b. no one can get more of the things he wants without someone else having to give up something.
c. prices are higher for abundant goods and lower for scarcer goods.
d. government regulation is used to keep prices low for essential goods like gasoline.

4. The graphical device which illustrates the concept of scarce resources being efficiently utilized in the economy is
a. a budget line.
b. an indifference curve.
c. a production possibilities frontier.
d. a marginal cost curve.

5. The coordination task of dividing products among consumers is a problem of
a. output selection.
b. production planning.
c. distribution.
d. market segmentation.

6. The division of steel between the auto industry and the aircraft industry is an example of
a. output selection.
b. distribution.
c. production planning.
d. all of the above.

7. When a surplus occurs in the market for a good,
a. quantity demanded exceeds quantity supplied and the market mechanism pushes the price up, which in turn encourages more production and less consumption.
b. quantity demanded exceeds quantity supplied and the market mechanism pushes the price down, which encourages more production and less consumption.
c. quantity supplied exceeds quantity demanded and the price falls, which discourages production and stimulates consumption.
d. quantity supplied exceeds quantity demanded and the price rises, which encourages more production and less consumption.

8. The free-market system coordinates output decisions by
a. pushing up price when there is a shortage.
b. pushing down price when quantity demanded exceeds quantity supplied.
c. pushing up price when there is a surplus.
d. pushing up price when quantity supplied exceeds quantity demanded.

9. If the MU of books is $10 and the MU of Compact Discs is $8, and the MC of each item is $4, then economic efficiency would require
a. increased production of books but not CDs.
b. increased production of CDs but not books.
c. increased production of both CDs and books.
d. reduced production of CDs to support increased production of books.

10. If the MU of cappuccinos is $2.50 and the MU of lattes is $4.00, and they both sell for the same price, we would expect consumers to
a. increase their purchases of cappuccinos.
b. increase their purchases of lattes.
c. not change their purchasing habits.
d. buy only lattes.



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