Question 1

According to the perfectly competitive benchmark, what is the primary role of prices in the market?

Accepted Answer

Prices direct the invisible hand, guiding resources to their most valued uses.

Question 2

Which of the following best describes Pareto efficiency in the context of a perfectly competitive market?

Accepted Answer

It is a situation where no one can be made better off without making someone else worse off.

Question 3

Adam Smith argued that self-interest in markets leads to:

Accepted Answer

Efficient outcomes through the invisible hand.

Question 4

Suppose the demand and supply in the banjo market are $Q_d = 12 - P$ and $Q_s = -2 + P$. What is the equilibrium price and quantity?

Accepted Answer

$P = 7, Q = 5$

Question 5

In a perfectly competitive market, what happens if the government sets a price ceiling below the equilibrium price?

Accepted Answer

There will be a shortage of goods and a deadweight loss.

Question 6

Which of the following is NOT a function of the invisible hand in a perfectly competitive market?

Accepted Answer

Ensuring that all market participants act altruistically.

Question 7

If the social surplus in a market is maximized, which of the following must be true?

Accepted Answer

The sum of consumer and producer surplus is at its highest possible value.

Question 8

What is deadweight loss?

Accepted Answer

The reduction in social surplus resulting from a market failure.

Question 9

Which of the following scenarios would justify government intervention based on efficiency in a perfectly competitive market?

Accepted Answer

When there is a market failure causing deadweight loss.

Question 10

If the marginal benefit (demand) is greater than the marginal cost (supply) at a given quantity, what does this imply?

Accepted Answer

There are potential gains from trade that are not being realized.

Question 11

Which of the following best describes the trade-off between efficiency and equity?

Accepted Answer

Making the economic pie as big as possible may not divide the pieces equally.

Question 12

In the context of Adam Smith's invisible hand, what is the main reason that self-interested behavior can lead to efficient outcomes?

Accepted Answer

Self-interested individuals respond to prices, which reflect the value of resources in their best use.

Question 13

Suppose a market is restricted to 2 units at a price of $40, but the equilibrium price is $60. What is the likely effect on social surplus?

Accepted Answer

Social surplus will decrease due to deadweight loss.

Question 14

If a perfectly competitive market is left unregulated, what outcome is expected regarding resource allocation?

Accepted Answer

Resources will be allocated to their highest valued uses.

Question 15

Which of the following is a real-world example of the invisible hand at work?

Accepted Answer

Uber drivers responding to surge pricing by increasing the number of cars on the road.

Question 16

If the government imposes a price floor above the equilibrium price, what is the likely market outcome?

Accepted Answer

A surplus will occur and deadweight loss will increase.

Question 17

Which of the following statements about perfectly competitive markets is FALSE?

Accepted Answer

They are always equitable.

Question 18

What is the formula for total surplus in a market?

Accepted Answer

$Total\ Surplus = Consumer\ Surplus + Producer\ Surplus$

Question 19

If a market is not in equilibrium and $Q_d > Q_s$ at the current price, what will likely happen?

Accepted Answer

The price will rise until equilibrium is reached.

Question 20

Which of the following best explains why free entry and exit in markets leads to efficient allocation of resources across industries?

Accepted Answer

It allows firms to move to industries with higher economic profits, reallocating resources to their highest valued uses.

ECN104 Lecture 7

Study Guide - Practice Questions