Question : In a free-market economy the allocation of resources is determined by
Option 1: voting is done by consumers
Option 2: a central planning authority
Option 3: consumer preferences
Option 4: the level of profits of firms
Correct Answer: consumer preferences
Solution : The correct answer is (c) consumer preferences.
In a free-market economy, resources are allocated through the interaction of supply and demand. The demand for a good or service is determined by the number of people who want to buy it, and the supply is determined by the number of people who are willing to sell it. The price of a good or service is determined by the intersection of supply and demand. Consumer preferences play a key role in determining the allocation of resources in a free-market economy. When consumers demand more of a good or service, the price of that good or service will rise. This will signal to producers that they should produce more of that good or service, as there is a profit to be made.
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