How does a free-market system address the output selection task?
What will be an ideal response?
A free-market system decides what should be produced via the “law” of supply and demand. Where there is a shortage, the market mechanism pushes the price upward, thereby encouraging more production and less consumption of the commodity that is in short supply. Where a surplus arises, the same mechanism works in reverse: The price falls, discouraging production and stimulating consumption. Under laissez-faire, the allocation of society’s resources among different products depends on consumer preferences and the production costs of the goods demanded. Prices vary so as to bring the quantity of each commodity produced into line with the quantity demanded.
You might also like to view...
Answer the following statement(s) true (T) or false (F)
1. In the long run, all inputs to a firm’s business can be adjusted. 2. When a firm experiences diminishing marginal product, its total output declines. 3. Fixed costs do not have to be paid if no output is produced. 4. In the short run, a firm’s average fixed cost rises with output. 5. Marginal cost is the change in fixed cost associated with a change in output by one unit.
Which is necessarily true for a purely competitive firm in short-run equilibrium?
A. Marginal revenue less marginal cost equals zero. B. Marginal revenue is zero. C. Price less average total cost equals zero. D. Total revenue less total cost equals zero.
The benefits from research and development activities
A. are limited to the firms investing in similar research and development projects. B. are limited to the nation in which the research and development is taking place. C. are limited to the firm winning a patent. D. spill over to others, including foreign residents.
Refer to the given data. Suppose the Fed wants to reduce the money supply by $200 billion to drive up interest rates and dampen inflation. To accomplish this, it could increase the reserve requirement from 20 percent to:
Answer the question on the basis of the following consolidated balance sheet of the
commercial banking system. Assume that the reserve requirement is 20 percent. All figures
are in billions and each question should be answered independently of changes specified in all
preceding ones.
A. 22 percent.
B. 25 percent.
C. 30 percent.
D. 33 percent.