BMAL-590 Microeconomics EXAM TEST
QUESTIONS AND ANSWERS VERIFIED
LATEST UPDATE (A+ PASS)
Microeconomics - Answers -✔✔ 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: - Answers -✔✔ 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 - Answers -✔✔ 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: - Answers -✔✔ 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 - Answers -✔✔ 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 - Answers -✔✔ requires choice
Choice - Answers -✔✔ 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 - Answers -✔✔ 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 - Answers -✔✔ when society gets the most from its scarce resources.
equality - Answers -✔✔ 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 - Answers -✔✔ 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 - Answers -✔✔ People face trade-offs in
the decisions that they make.
opportunity cost - Answers -✔✔ 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? - Answers -✔✔
To bake cookies, Dana gives up teaching yoga. Her earnings from yoga are 4 hours x
$80/hour = $320.
Rational people - Answers -✔✔ 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.
- When a student considers whether to go to college for an additional year, he
compares the fees and foregone wages to the extra income he could earn with the extra
year of education.
- When a manager considers whether to increase output, she compares the cost of the
needed labor and materials to the extra revenue.
incentive - Answers -✔✔ something that induces a person to act, such as the prospect
of a punishment or a reward.
Because rational people make decisions by comparing costs and benefits, they respond
to incentives.
Examples:
- When fuel prices rise, consumers buy more hybrid cars and fewer less fuel efficient
SUVs or trucks.
- When cigarette taxes increase, teen smoking falls.
Suppose the cost of flying a 200-seat plane for an airline is $100,000 and there are 10
empty seats on a flight. If the marginal cost of flying a passenger is $200 and a standby
passenger is willing to pay $300, the airline should - Answers -✔✔ sell the ticket
because the marginal benefit exceeds the marginal cost.
The rational thinker makes decisions where MB > MC. In this case, the MB = $300 and
the MC = $200 so the airline should sell the ticket.
