BMAL590 MICROECONOMICS EXAM QUESTIONS AND ANSWERS
Microeconomics - CORRECT ANSWER✅✅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: - CORRECT ANSWER✅✅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 - CORRECT ANSWER✅✅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: - CORRECT ANSWER✅✅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 - CORRECT ANSWER✅✅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 - CORRECT ANSWER✅✅requires choice
Choice - CORRECT ANSWER✅✅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 - CORRECT ANSWER✅✅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 - CORRECT ANSWER✅✅when society gets the most from its scarce resources.
equality - CORRECT ANSWER✅✅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 - CORRECT ANSWER✅✅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 - CORRECT ANSWER✅✅People face trade-offs in the decisions that they make.
opportunity cost - CORRECT ANSWER✅✅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? - CORRECT ANSWER✅✅To bake cookies, Dana gives up
teaching yoga. Her earnings from yoga are 4 hours x $80/hour = $320.
Rational people - CORRECT ANSWER✅✅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.
Microeconomics - CORRECT ANSWER✅✅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: - CORRECT ANSWER✅✅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 - CORRECT ANSWER✅✅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: - CORRECT ANSWER✅✅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 - CORRECT ANSWER✅✅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 - CORRECT ANSWER✅✅requires choice
Choice - CORRECT ANSWER✅✅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 - CORRECT ANSWER✅✅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 - CORRECT ANSWER✅✅when society gets the most from its scarce resources.
equality - CORRECT ANSWER✅✅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 - CORRECT ANSWER✅✅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 - CORRECT ANSWER✅✅People face trade-offs in the decisions that they make.
opportunity cost - CORRECT ANSWER✅✅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? - CORRECT ANSWER✅✅To bake cookies, Dana gives up
teaching yoga. Her earnings from yoga are 4 hours x $80/hour = $320.
Rational people - CORRECT ANSWER✅✅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.
