Which of the following is true of a market system?

• A. Resources are allocated solely based on tradition and custom.
• B. The government sets all prices for goods and services.
• C. Prices are determined by the interaction of supply and demand.
• D. Production decisions are made exclusively by central planners.

Answer: (C)

Verified step by step guidance

1. Step 1: Understand the concept of a market system. A market system, also known as a market economy, is an economic system where decisions about production, investment, and distribution are guided by the price signals created by the forces of supply and demand.
2. Step 2: Analyze the role of prices in a market system. Prices in a market system are not set by tradition, government, or central planners; instead, they emerge from the interaction between buyers (demand) and sellers (supply).
3. Step 3: Compare the given options with the characteristics of a market system. For example, 'Resources are allocated solely based on tradition and custom' describes a traditional economy, not a market system.
4. Step 4: Recognize that 'The government sets all prices for goods and services' and 'Production decisions are made exclusively by central planners' describe a command economy, which contrasts with a market system.
5. Step 5: Conclude that the correct statement about a market system is that 'Prices are determined by the interaction of supply and demand,' reflecting the decentralized decision-making process typical of market economies.