Answers to End-of-Chapter Questions
by David Colander
A Note about the Answers
The following answers are meant as guides to answering the end-of-chapter questions, not as definitive answers. The same questions often have many answers; this is especially true of policy-oriented questions. Although we have tried hard to see that mistakes are eliminated, the reality is that, as in any human endeavor, mistakes are inevitable. If you have checked and double-checked your answer and it is substantially different from that found here, assume that our answer is wrong, not yours. If you do come to a different answer, or think an answer misses an important aspect of the question, please check for corrections at my website to see if the answer has changed. If you don’t find it there, please e-mail me at Colander@Middlebury.edu with your answer and an explanation of why you think it is better. I will get back to you and if I think you are right, I will post the change on the Web page marked “Corrections,” together with your name and a thank-you.
Chapter 3: The Evolving U.S. Economy in Perspective
Questions for Thought and Review
1. The central coordinating mechanism in a market economy is price.
2. The central coordinating mechanism in Soviet-style socialism is the central planners.
3. Market economies solve the three problems through markets and the system of rewards and payments. What gets produced is what businesses believe can be sold. How it gets produced is determined by business; generally they choose the method that makes the largest profit. Those who are willing to pay for the goods at the market-determined prices will get them. Thus, supply and demand determine what, how, and for whom to produce.
4. Soviet-style socialism solves the three problems by using administrative control. Central planners decide what to produce according to what they believe is socially beneficial. Central planners decide how to produce guided by what they believe is good for the country. Central planners decide distribution based on their perception of individuals’ needs.
5. The answer to this question requires determining what is meant by better. Economics can explain how each system functions and explain how efficient each is, but economics does not provide an answer to normative questions without imposing normative judgments.
6. Markets have little role in most families. In most families decisions about who gets what are usually made by benevolent parents. Because families are small and social bonds strong, this benevolence can work. Thus, a socialist organization seems more appropriate to a family and a market-based organization to a large economy where social bonds don’t hold the social unit together. The propensity to look after the common good is much stronger in a family than in an entire economy.
7. False. Past systems such as, feudalism and mercantilism, as well as the more recent Soviet-style socialism and market economies have all involved planning. The difference is in who does the planning. Feudalism relied on tradition for the planning. In mercantilism, the government did most of the planning. In Soviet-style socialism, central planners did the planning. In market economies, the managers of firms do the planning, with consumers deciding whether those plans are correct.
8. An economy depends on coordination, and the mechanisms of coordination depend on the people who choose which goods to supply and what to demand. People supply the labor that makes the economy run. Economic growth, and what is considered a resource depend on technology, and people develop new technologies. Even the institutions that oversee the economy are governed by that economy’s people. It follows that the economy’s ultimate strength resides in its people.
9. Consumers decide what goods they want, and demonstrate their decisions in their willingness to pay for the goods. Businesses decide what to produce, but their decisions reflect