BMAL-590 Microeconomics Exam Questions and Answers With Verified
Solutions 2025
Microeconomics - ✔✔focuses on individual actions of sellers (producers) and buyers (consumers) and
how those actions have consequences for the availability, distribution, and utilization of scarce
resources.
When we refer to "individual" action, we are referring to: - ✔✔a variety of actors that in microeconomic
terms can be referred to as sellers (producers) and buyers (consumers). These actors influence the
supply of and demand for goods and services. The means for achieving coordination are generally
money and interest rates.
normative science - ✔✔the idea that science follows objective rules of evidence and is unaffected by the
personal beliefs or values of scientists
Microeconomics can be considered a normative science. It does not prescribe a course of action. Rather,
it tries to explain what might happen as a result of certain changes.
For example, if the supply of crude oil decreases, microeconomics suggests that the price of gasoline
may increase. At a certain level, it may even suggest that buyers will buy less gasoline.
Microeconomics has two main schools or streams of thought: - ✔✔One school is the general equilibrium
theory (introduced by Leon Walras in 1874)
2nd, is partial equilibrium theory (introduced by Alfred Marshall in 1890). This school of thought
believes in developing measurable hypotheses related to economic events, and subjecting the
hypotheses to empirical testing to determine which of the hypotheses work best.
Since it is difficult to replicate tests, economists make several assumptions such as infinite sellers and
buyers, perfect knowledge, homogeneous goods and services, and static relationships to arrive at
solutions.
,Austrian school - ✔✔argues that the equilibrium theories are flawed and unrealistic. The Austrian school
acknowledges imperfections and heterogeneityand tries to explain how economic incentives might
facilitate individuals overcoming the problems posed by uncertainty and ignorance.
Thus, the Austrian school proposes that markets exist precisely because people have incomplete
knowledge, differing preferences, and other imperfections.
Scarcity - ✔✔requires choice
Choice - ✔✔refers to people having to choose which of their desires they will satisfy and which they will
leave unsatisfied.
When we, either as individuals or as a society, choose more of something, scarcity forces us to have less
of something else.
Trade-offs - ✔✔Alternatives that must be given up when one is chosen rather than another
All decisions that people make involve trade-offs of one goal against another. To get one thing that we
like, we usually have to give up another thing that we also like.
Examples:
- Going to movie night before your final exam leaves less time for a college student to study.
- Having more money to buy stuff requires working longer hours, which leaves less time for family and
relaxation.
efficiency - ✔✔when society gets the most from its scarce resources.
equality - ✔✔when prosperity is distributed uniformly among society's members.
The tradeoff is that to achieve greater equality by redistributing income from higher wage earners to the
poor. But this redistribution reduces the incentive to work and produce, and it shrinks the size of
economic prosperity.
, A note about the redistribution of income - ✔✔The redistribution of income from the wage earners to
poorer people is accomplished through a progressive tax system and well-defined social programs like
food stamps and unemployment insurance that try to provide a safety net for people at the low end of
the income distribution. But, a progressive tax system reduces the incentive to work. The reward for
working hard is a high income. Taxes reduce this reward and therefore reduce the incentive to work
hard.
John is an athlete. He has $120 to spend and wants to buy either a heart rate monitor or new running
shoes. Both the heart rate monitor and running shoes cost $120, so he can only buy one. This illustrates
the principle that - ✔✔People face trade-offs in the decisions that they make.
opportunity cost - ✔✔of any item is whatever must be given up to obtain it. It is the cost associated with
the next best alternative only.
It is the relevant cost for decision making. Making decisions requires comparing the costs and benefits of
alternative choices.
- The opportunity cost of going to graduate school for two years is not just cost of the tuition, books, and
fees, but also the cost of foregone wages.
- The opportunity cost of seeing a play is not only the price of the ticket and any concessions, but also
the value of the time you spend at the theater.
Dana, who is a trained yoga instructor, spends 4 hours on Monday baking and packing 10 boxes of
cookies. She sells the cookies for $10 a box. Given that she can also teach yoga for $80 an hour, what is
her opportunity cost of baking cookies? - ✔✔To bake cookies, Dana gives up teaching yoga. Her earnings
from yoga are 4 hours x $80/hour = $320.
Rational people - ✔✔Systematically and purposefully do the best they can to achieve their objectives.
Often make decisions by comparing the marginal benefit (MB) and the marginal cost (MC) of a proposed
action.
Rational decision makers take action if and only if
MB > MC.
Solutions 2025
Microeconomics - ✔✔focuses on individual actions of sellers (producers) and buyers (consumers) and
how those actions have consequences for the availability, distribution, and utilization of scarce
resources.
When we refer to "individual" action, we are referring to: - ✔✔a variety of actors that in microeconomic
terms can be referred to as sellers (producers) and buyers (consumers). These actors influence the
supply of and demand for goods and services. The means for achieving coordination are generally
money and interest rates.
normative science - ✔✔the idea that science follows objective rules of evidence and is unaffected by the
personal beliefs or values of scientists
Microeconomics can be considered a normative science. It does not prescribe a course of action. Rather,
it tries to explain what might happen as a result of certain changes.
For example, if the supply of crude oil decreases, microeconomics suggests that the price of gasoline
may increase. At a certain level, it may even suggest that buyers will buy less gasoline.
Microeconomics has two main schools or streams of thought: - ✔✔One school is the general equilibrium
theory (introduced by Leon Walras in 1874)
2nd, is partial equilibrium theory (introduced by Alfred Marshall in 1890). This school of thought
believes in developing measurable hypotheses related to economic events, and subjecting the
hypotheses to empirical testing to determine which of the hypotheses work best.
Since it is difficult to replicate tests, economists make several assumptions such as infinite sellers and
buyers, perfect knowledge, homogeneous goods and services, and static relationships to arrive at
solutions.
,Austrian school - ✔✔argues that the equilibrium theories are flawed and unrealistic. The Austrian school
acknowledges imperfections and heterogeneityand tries to explain how economic incentives might
facilitate individuals overcoming the problems posed by uncertainty and ignorance.
Thus, the Austrian school proposes that markets exist precisely because people have incomplete
knowledge, differing preferences, and other imperfections.
Scarcity - ✔✔requires choice
Choice - ✔✔refers to people having to choose which of their desires they will satisfy and which they will
leave unsatisfied.
When we, either as individuals or as a society, choose more of something, scarcity forces us to have less
of something else.
Trade-offs - ✔✔Alternatives that must be given up when one is chosen rather than another
All decisions that people make involve trade-offs of one goal against another. To get one thing that we
like, we usually have to give up another thing that we also like.
Examples:
- Going to movie night before your final exam leaves less time for a college student to study.
- Having more money to buy stuff requires working longer hours, which leaves less time for family and
relaxation.
efficiency - ✔✔when society gets the most from its scarce resources.
equality - ✔✔when prosperity is distributed uniformly among society's members.
The tradeoff is that to achieve greater equality by redistributing income from higher wage earners to the
poor. But this redistribution reduces the incentive to work and produce, and it shrinks the size of
economic prosperity.
, A note about the redistribution of income - ✔✔The redistribution of income from the wage earners to
poorer people is accomplished through a progressive tax system and well-defined social programs like
food stamps and unemployment insurance that try to provide a safety net for people at the low end of
the income distribution. But, a progressive tax system reduces the incentive to work. The reward for
working hard is a high income. Taxes reduce this reward and therefore reduce the incentive to work
hard.
John is an athlete. He has $120 to spend and wants to buy either a heart rate monitor or new running
shoes. Both the heart rate monitor and running shoes cost $120, so he can only buy one. This illustrates
the principle that - ✔✔People face trade-offs in the decisions that they make.
opportunity cost - ✔✔of any item is whatever must be given up to obtain it. It is the cost associated with
the next best alternative only.
It is the relevant cost for decision making. Making decisions requires comparing the costs and benefits of
alternative choices.
- The opportunity cost of going to graduate school for two years is not just cost of the tuition, books, and
fees, but also the cost of foregone wages.
- The opportunity cost of seeing a play is not only the price of the ticket and any concessions, but also
the value of the time you spend at the theater.
Dana, who is a trained yoga instructor, spends 4 hours on Monday baking and packing 10 boxes of
cookies. She sells the cookies for $10 a box. Given that she can also teach yoga for $80 an hour, what is
her opportunity cost of baking cookies? - ✔✔To bake cookies, Dana gives up teaching yoga. Her earnings
from yoga are 4 hours x $80/hour = $320.
Rational people - ✔✔Systematically and purposefully do the best they can to achieve their objectives.
Often make decisions by comparing the marginal benefit (MB) and the marginal cost (MC) of a proposed
action.
Rational decision makers take action if and only if
MB > MC.
