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

• A. All goods and services are provided free of charge.
• B. Resources are allocated based on tradition.
• C. Prices are determined by supply and demand.
• D. The government sets all production targets.

Answer: (C)

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. Eliminate options that do not align with market economy principles: 'All goods and services are provided free of charge' contradicts the concept of market transactions; 'Resources are allocated based on tradition' describes a traditional economy; 'The government sets all production targets' describes a command economy.
4. Identify that the characteristic 'Prices are determined by supply and demand' correctly describes how a market economy functions.
5. Conclude that the defining feature of a market economy is the role of prices as signals that coordinate economic activity through supply and demand.