1. In a market system, who determines what is produced?
   In free markets (where there is no government interference), it is the consumers that fundamentally determine what is produced, because businesses respond to consumers' demand for products. When consumers change their preferences, businesses react to those changes by changing what they produce. For example, when many consumers bought DVD players, the demand for movies on DVDs increased and the demand for movies on videotape decreased. Movie studios put more of their movies, even old movies, onto DVDs, and rental outfits started stocking more DVDs and fewer videotapes.
   
   
2. Why do different people earn different incomes and why do different jobs pay different wages?
   Different jobs require different sets of skills, knowledge, and abilities, as well as different risks of injury, resulting in many different labor markets. In each labor market, the demand and supply of a specific type of labor determine the equilibrium wage rate. Depending on the demand and supply conditions in different labor markets, wages are very likely to be different. Economists refer to these wage differences due to different risks or job characteristics as compensating wage differentials.
   
   
3. When the government intervenes in the market by providing a subsidy, what is the result?
   A subsidy provided by the government reduces the price consumers actually have to pay for the subsidized good or service. The subsidy increases the demand for the good or service, causing an increase in the market price and the quantity produced and sold.
   
   
4. When the government intervenes in the market by setting a price floor or ceiling, what is the result?
   A price ceiling occurs when a price is not permitted to rise above a specified amount. If this maximum price is below the equilibrium price, the quantity demanded by consumers at that price will exceed the amount that producers are willing to supply, and a shortage develops. Since the price method cannot be used to allocate the good or service, other methods must be used. A price floor occurs when a price is not permitted to fall below a specified amount. If this minimum price is above the equilibrium price, the quantity demanded by consumers at that price will fall short of the amount that producers are willing to supply, and a surplus develops.
   
   
5. When the government intervenes in the market with a tariff, what is the result?
   A tariff is a tax the government places on products imported from another country. The tax raises the cost of importing the product, reducing the supply of the imported product. Because of the supply reduction, the quantity imported goes down and the price goes up.