Chapter 2
A. Short-Answer, Essays, and Problems
1. Explain the term “laissez faire capitalism.”
2. Explain what is meant by a command economy.
3. Evaluate the statement: “The government should have no place in a capitalistic market system.”
4. List nine characteristics of the market system.
5. Why is the right of private property an essential characteristic of a market system?
6. What role does freedom play in capitalism? How important is it to the operation of a competitive
market economy?
7. Explain the importance of self-interest in the operation of a market system.
11. Explain why the market system is an organizing mechanism.
14. What are the economic advantages of specialization?
16. What advantage does a money economy have over a barter economy?
18. What is money and what important function does it perform? Explain how it overcomes
the disadvantages associated with barter. What conditions are necessary for people to accept paper
currency in exchange for the goods and services which they sell?
20. What are the so-called Five Fundamental Questions that every economy must answer?
21. A firm has the choice between producing product A, B, or C. In producing the products the firm
faces a weekly cost of $10 for product A, $130 for product B and $200 for product C. The prices
received for each product at different quantities are listed in the table below.
Output Product A Product B Product C Profit A Profit B Profit C
5 $3.00 $15.00 $35.00 _____ _____ _____
10 2.00 12.00 20.00 _____ _____ _____
15 1.25 9.00 10.00 _____ _____ _____
(a) Compute the firm’s profit for A, B, and C and enter this data into the table.
(b) Which product will the firm choose to produce and how much output will maximize profit?
