Which of the following is a characteristic of a market economy?

• A. The government sets all production targets.
• B. Prices are determined by supply and demand.
• C. Resources are allocated based on central planning.
• D. Private property is not allowed.

Answer: (B)

Verified step by step guidance

1. Understand the definition of a market economy: it is an economic system where decisions about production, investment, and distribution are guided by the price signals created by supply and demand.
2. Recognize that in a market economy, prices are not fixed by the government but fluctuate based on the interaction between buyers and sellers.
3. Identify that government control over production targets and central planning are characteristics of a command or planned economy, not a market economy.
4. Note that private property rights are fundamental in a market economy, allowing individuals and firms to own resources and make economic decisions.
5. Conclude that the key characteristic of a market economy is that prices are determined by supply and demand, which guides resource allocation efficiently.