2 The problems of resource allocation

Chapter Two The problems of resource allocation

Self-assessment Questions

2.1 The decrease in demand for private housing will lead to lower prices, and estate

developers’ revenues from construction will fall. They will reduce their construction of

housing units. This will in turn lead to a decrease in demand for resources used in the

construction industry, such as cement and construction workers.

2.2 False! In a command economy, the government owns most of the productive resources.

Some productive resources are still privately owned.

Moreover, it is wrong to say that the government owns all consumer goods.

2.3 In a market economy, most productive resources are owned by private individuals,

whereas in a command economy, they are owned collectively by the government.

In a market economy, people are free to make consumption and production decisions;

they are also free to make employment decisions. In a command economy, the

government issues commands to determine the pattern of production. Through

controlling prices and wages, the government also controls the distribution of goods

among its people. People do not have the freedom of choice in jobs.

Multiple Choice Questions

New Introductory Economics 3rd Edition 3 © Pearson Education Asia Limited 2003
Suggested Solutions
 2 The problems of resource allocation

1 A 2 C 3 B 4 B 5 B

6 B 7 B 8 A 9 B 10 D

2 Option (B) is wrong. In a market economy, most, not all, economic problems are solved

by market mechanism.

4 Option (A) is wrong. The concept of cost is a general one. Its meaning is the same in a

market economy and a command economy.

Option (B) is correct. The government controls wage rates in different occupations,

thereby determining how income is distributed.

10 The problem of scarcity does not imply that we must adopt a market or a command

economy. So, option (A) and (B) are both wrong.

New Introductory Economics 3rd Edition 4 © Pearson Education Asia Limited 2003
Suggested Solutions