Which of the following is an example of a market economy?

• A. North Korea, where the government controls all production and pricing
• B. Ancient Egypt, where the Pharaoh directed economic activity
• C. The United States, where prices are determined by supply and demand
• D. Cuba, where most resources are allocated by the government

Answer: (C)

Verified step by step guidance

1. Step 1: Understand the definition of a market economy. A market economy is an economic system where decisions about production, investment, and distribution are guided by the price signals created by supply and demand, with minimal government intervention.
2. Step 2: Analyze each option by identifying the role of government and market forces in economic decision-making. For example, if the government controls production and pricing, it is not a market economy.
3. Step 3: Recognize that North Korea and Cuba have economies where the government heavily controls resources and pricing, which characterizes command economies rather than market economies.
4. Step 4: Note that Ancient Egypt, with economic activity directed by the Pharaoh, also represents a command or centrally planned economy, not a market economy.
5. Step 5: Identify that the United States, where prices are determined by supply and demand, exemplifies a market economy because economic decisions are largely made by individuals and firms responding to market signals.