An economic system is said to be a
a. market economy if there is substantial central planning
b. traditional economy if it relies on extensive market trading
c. market economy if it relies on self-interested behavior and incentives
d. command economy if it relies on long-standing practices
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Of these options, the only correct answer is C. A economic system that relies on self-interested behavior and incentives is a market economy.
A is wrong because market economies are not planned. A economy with substantial central planning is, in economic language, a command economy. In a command economy, the government answers the fundamental economic questions. Central planners decide what will be made, how, and for whom.
B is not correct because traditional economies do not have large markets. Traditional economies tend to be run on a very small scale, mostly through barter and trade. If most transactions are conducted using money, the economy is not traditional.
D is not correct because it is traditional economies, not command economies, that rely on long-standing practices. Traditional economies are, as their name implies, based on tradition. Command economies do what the government says, not what tradition says.
C is correct because people in market economies act in their own self-interest. Consumers try to buy the best goods at the lowest prices. Producers try to make the maximum possible profit when they sell. In a market economy, everyone does what is best for them, not what the government says or what tradition says.
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