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IAI Actuarial Core Principles · Business Economics · Relationship between economics and business

In a pure command economy, which of the following best describes how decisions on what to produce and how to allocate resources are made?

In a pure command economy, a central authority decides what is produced and how resources are allocated through planning and directives, rather than relying on market prices, consumer choice or competition between profit-seeking firms.

  1. ABy a central authority through planning and directivesCorrect
  2. BBy individual consumers through price signals in free markets
  3. CBy firms competing to maximise their profits
  4. DBy voluntary exchange between households and firms
  5. By a mix of private ownership and market prices with minimal state role

Explanation

In a command economy the state owns most resources and a central planning body decides output and allocation. Price signals and competition, as in the other options, characterise market systems rather than command systems.

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