Answers to Multiple-Choice Questions
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d
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Answers to Fill-In Questions
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competition and the price mechanism
pursued their own selfish interests
public goods
external benefit
pollution, congestion
Answers To Questions For Further Thought And Discussion
What are the three basic economic questions that all economies must answer?
Describe the differences in the ways that capitalism and socialism answer these three
questions.
The questions are: What? How? and For whom?
Under capitalism what is produced is determined by consumer demand. How is
determined by the business firm, which seeks to produce things as cheaply as
possible. For whom is determined by who has the dollars to pay for these goods
and services.
Under socialism what is produced is determined by consumer demand, but also by
the government. How can be determined by the business firm or by the
government, depending on whether the firm or the government is producing the
good or service. For whom is determined largely by the government which either
controls income or redistributes income.
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What was Adam Smith’s invisible hand, and what economic function did it serve?
The invisible hand was the profit motive which led the entrepreneur to produce
goods and services. Although the entrepreneur had no intention of promoting the
public interest, his pursuit of profits led him to do just that by producing goods
and services that people needed.
What are the two basic classes of market failure? What would be an example of
each?
The two basic classes of market failure are externalities and public goods.
Examples of externalities are pollution, congestion, sand acid rain. Examples of
public goods include the defense provided by the military, police and fire
protection, and streets.
What are the consequences of overspecialization? Give an example of a job that is
overspecialized.
Overspecialization can lead to boredom and alienation. Telemarketers, elevator
operators, and assembly line workers have overspecialized jobs.
For many years Americans referred to the people’s Republic of China as
“Communist China.” Why would that label be misleading today?
China was certainly a communist society well into the 1970’s, before individual
business firms and privately owned farms were allowed. The nation lived by the
communist slogan, “From each according to his ability, to each according to his
needs.” By 1984 the Communist Party’s Central Committee proclaimed a new
slogan, “More pay for more work; less pay for less work.” Today the engine of
economic growth is private enterprise. A price system flourishes and while an
oppressive political dictatorship remains in power, the economy is becoming
increasingly capitalistic.
Explain why you would prefer to live in a socialist or a capitalist country.
I’ll give my own reasons, which may differ from yours. I would prefer a capitalist
country because I would have a good chance to become rich, because the average
standard of living may be very high, and because people are extended a great deal
of economic freedom. On the other hand, in a socialist country perhaps no one is
poor, incomes are more evenly distributed, and the government provides a wide
array of services including free college tuition, childcare, and medical insurance.
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