Question

1.) price elasticity of demand measures the sensitivity of a change in price of a product to its demand.

a.) true

b.) false

2.) The invisible hand guides government's economic activity just as it does with private economic activity.

a.) true

b.) false

3.) when there is an external benefit (positive externality) in a free market, there is too little of the good produced and consumed.

a.) true

b.) false

4.) which of the following best describes market failure?

a.) Negative externalities

b.) positive externalities

c.) public goods

d.) All of these

Answer 1

1. False.

• Price elasticity measures the sensitivity of demand of a product to the changes in its price.
• It is not measure of sensitivity of the price change to a products demand.

2. False.

• The invisible hand does not guide government activity rather it guides the firm's in a free market to reach an equilibrium level of demand supply automatically.

3. True.

• When there is a positive externality, only few of the goods are produced and consumed.
• This is because these free markets may not value them more based on their benefits and fail to price them accordingly.

4. Option D.

• Market failure is said to occur when the market equilibrium is disturbed and is inefficient in producing those goods and services desired by the consumer's.
• Externalities and public goods are two of the main sources of market failures.
• When the market fails to appropriately measure the cost and benefits of each goods and services it produces, it will cause these benefits and costs to get transferred to a third party.
• Public goods can cause free rider problem in which a consumer may consume maximum without even paying for it and hence can cause inefficiencies in the market.