4. The competitive market system:
A. encourages innovation because government provides tax breaks and subsidies to those who develop new products or new productive techniques.
B. discourages innovation because it is difficult to acquire additional capital in the form of new machinery and equipment.
C. discourages innovation because firms want to get all the profits possible from existing machinery and equipment.
D. encourages innovation because successful innovators are rewarded with economic profits.

Question

4.    The competitive market system:
A.    encourages innovation because government provides tax breaks and subsidies to those who develop new products or new productive techniques.
B.    discourages innovation because it is difficult to acquire additional capital in the form of new machinery and equipment.
C.    discourages innovation because firms want to get all the profits possible from existing machinery and equipment.
D.    encourages innovation because successful innovators are rewarded with economic profits.

BlackTom AI · Accepted Answer

To begin, let's lay out the question and the provided answer choices clearly so we can evaluate each option in turn.
Question: The competitive market system:
A. encou rages innovation because government provides tax breaks and subsidies to those who develop new products or new productive techniques.
B. discourages innovation because it is difficult to acquire additional capital in the form of new machinery and equipment.
C. discourages innovation because firms want to get all the profits possible from existing machinery and equipment.
D. encourages innovation because successful innovators are rewarded with economic profits.

Now, examining each option:
Option A: This statement attributes innovation incentives to government tax breaks and subsidies. In a competitive market economy, the standard view is that government intervention can affect innovation, but in a purely competitive market framework with minimal government intervention, innovation is typically driven by market signals, expected profits, and competition rather than by government-provided subsidies. Therefore, Option A is not aligning with the core characterization of a competitive market system.
Option B: This claim says innovation is discouraged because it is hard to obtain additional capital for new machinery. In a competitive market, capital is allocated by price signals—interest rates and the cost of capital reflect scarcity and risk. While capital acquisition can be a constraint, the premise that competition inherently discourages innovation due to capital difficulties is not a standard, general conclusion of competitive theory; firms often raise capital by selling equity or debt, and profits from innovations attract investors. Hence, this option misreads the classic mechanism.
Option C: This option states that innovation is discouraged because firms want to capture all profits from existing machinery and equipment. While profit-maximizing behavior can influence investment, the idea that firms deliberately reduce innovation to cling to current assets oversimplifies and misstates the incentive structure in competitive markets. In fact, the prospect of above-average profits from innovations motivates firms to innovate, and competition tends to erode profits over time, spurring ongoing innovation rather than suppressing it. This makes Option C suspect.
Option D: This choice argues that innovation is encouraged because successful innovators are rewarded with economic profits. This aligns with fundamental economic reasoning: in competitive markets, the potential for profit signals to innovate, recoup investments, and gain market share, thus driving inventive activities. Even as competition erodes profits over time, the possibility of earning profits from successful innovations creates incentives to innovate, which is a core argument for why markets promote technological progress and efficiency.

In sum, Option B and Option C rely on flawed or overly simplistic readings of competition—capital constraints being a blanket discouragement, or firms resisting innovation to protect existing profits—whereas Option A misattributes the motivation structure to government subsidies within a pure competitive framework. Option D correctly captures the incentive mechanism: the prospect of earning profits from new ideas and improvements motivates innovation in a competitive market.

ECNM1116.32925.202530 Practice Quiz 2 The Market System and the Circular Flow

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