In a free enterprise system, which of the following best describes the role of prices?

• A. Prices are set by the government to ensure fair distribution of goods.
• B. Prices act as signals to both buyers and sellers, helping allocate resources efficiently.
• C. Prices are determined solely by producers without any influence from consumers.
• D. Prices have no impact on consumer or producer decisions.

Answer: (B)

Verified step by step guidance

1. Understand the context of a free enterprise system, where prices are typically determined by the interaction of supply and demand rather than by government intervention.
2. Recall that prices serve as signals in a market economy, conveying information to both buyers and sellers about the relative scarcity or abundance of goods and services.
3. Recognize that when prices rise, it signals producers to supply more and consumers to buy less, and when prices fall, it signals producers to supply less and consumers to buy more.
4. Understand that this signaling function of prices helps allocate resources efficiently by balancing supply and demand without the need for central planning.
5. Conclude that the role of prices in a free enterprise system is to act as signals to both buyers and sellers, guiding their decisions and ensuring resources are allocated where they are most valued.