Question 1

Which of the following best describes the concept of the 'invisible hand' as introduced by Adam Smith?

Accepted Answer

The process by which self-interested individuals unintentionally promote the overall good of society through market interactions.

Question 2

In a perfectly competitive market, what is the condition for Pareto efficiency?

Accepted Answer

No one can be made better off without making someone else worse off.

Question 3

Suppose the equilibrium price for iPhones in a competitive market is $40. If the government restricts the quantity to 2 units at this price, what happens to social surplus?

Accepted Answer

Social surplus decreases to $100.

Question 4

Which formula correctly represents social surplus in a market?

Accepted Answer

$$Social\ Surplus = Consumer\ Surplus + Producer\ Surplus$$

Question 5

A firm operates two plants: one old with higher marginal costs and one new with lower marginal costs. According to the invisible hand, what should the CEO do to maximize efficiency?

Accepted Answer

Shift all production to the new plant with lower marginal costs.

Question 6

If the market price is set below equilibrium due to a price control, what is the likely outcome?

Accepted Answer

A shortage of goods.

Question 7

Which of the following best explains why entry and exit of firms in an industry is a sign of a well-functioning market?

Accepted Answer

It reallocates resources to their highest valued uses, maximizing social welfare.

Question 8

Given the following: $$P \u003e ATC$$ for a firm in a competitive market. What does this imply?

Accepted Answer

The firm is earning economic profits.

Question 9

What is deadweight loss?

Accepted Answer

The reduction in social surplus resulting from a market intervention.

Question 10

Which of the following is NOT a function of prices in a market economy?

Accepted Answer

Ensuring an equal distribution of income.

Question 11

Suppose Uber does not use surge pricing after a football game, and the price remains at $15 while demand increases. What is the likely result?

Accepted Answer

Excess demand for Uber rides.

Question 12

Which of the following best describes the trade-off between equity and efficiency?

Accepted Answer

Making the economic pie as large as possible may not result in equal slices for everyone.

Question 13

In a perfectly competitive market, what is the relationship between price and marginal cost at equilibrium?

Accepted Answer

$$P = MC$$

Question 14

Which of the following is a coordination problem in economics?

Accepted Answer

How to bring together self-interested economic agents to form markets.

Question 15

If a market is Pareto efficient, what does this imply about government intervention?

Accepted Answer

Government intervention cannot be justified based on efficiency, but may be justified based on equity.

Question 16

Which of the following scenarios best illustrates the invisible hand at work?

Accepted Answer

Self-interested firms and consumers interact in markets, leading to efficient outcomes.

Question 17

What is the main economic function of parking meters in a city?

Accepted Answer

To allocate scarce parking spaces efficiently using prices.

Question 18

Which of the following is a likely result of a rightward shift in the demand curve for bottled water, holding supply constant?

Accepted Answer

Equilibrium price and quantity both increase.

Question 19

If a firm in a competitive market finds that $$P \u003c ATC at $$its current output, what should it consider doing in the long run?

Accepted Answer

Exit the market.

Question 20

Which of the following statements about command economies is correct?

Accepted Answer

A central agency directs resources and provides incentives.

Perfect Competition and the Invisible Hand: Efficiency, Resource Allocation, and Market Outcomes

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