Microeconomics 2nd Edition Bernheim Test Bank 1

Test bank for Microeconomics 2nd Edition
Bernheim Whinston 0073375853 9780073375854
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Chapter 05
Constraints, Choices, and Demand
Multiple Choice Questions
1. A consumer's budget constraint is determined by:
A. a consumer's income.
B. a consumer's income and preferences.
C. a consumer's income and the prices of the goods she buys.
D. a consumer's preferences and the prices of the goods she buys.
5-1
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
2. A consumer's budget constraint is:
A. a positively-sloped line.
B. a negatively-sloped line.
C. convex.
D. a vertical line at the level of the consumer's income.
3. Suppose a consumer purchases pizza and soft drinks. If pizza is measured on the vertical axis
and soft drinks are measured on the horizontal axis, then the slope of the budget line is equal
to:
A. the price of pizza divided by the price of soft drinks.

B. the price of soft drinks divided by the price of pizza.
C. the price of pizza divided by the price of soft drinks times negative one.
D. the price of soft drinks divided by the price of pizza times negative one.
4. Consumption bundles that lie above the boundary established by the budget line:
A. are affordable for the consumer.

B. are preferred by the consumer but are not affordable.
C. are not preferred by the consumer.
D. do not exhaust the consumer's income.
5. Terry buys 10 pounds of cheese and 12 boxes of crackers each month. A pound of cheese
costs $5 and a box of crackers costs $3. If she is maximizing her utility, what is her monthly
income?
A. $86
B. $90
C. $80
D. There is not enough information to determine her monthly income.
5-2
6. The price of bread is $1.50 per pound and the price of butter is $3 per pound. Steve has an
income of $30, with which he buys 4 pounds of bread. How many pounds of butter does he
buy, assuming he buys nothing else and he maximizes his utility?
A. 8
B. 12
C. 4
D. There is not enough information to answer the question.
7. Suppose a consumer buys pizza (P) and soft drinks (S). The price of pizza is $10, the price of
soft drinks is $2 and the consumer's income is $100. If pizza is measured on the vertical axis
and soft drinks are measured on the horizontal axis, then the consumer's budget constraint is
given by:
A. P = 10 - (1/5)S
B. S = 10 - (1/5)P
C. P = 100 - 5S
D. P = 10 - 5S
8. Suppose a consumer buy books and DVDs. The price of a book is $10, the price of a DVD is
$20 and the consumer's income is $400. If books are measured on the vertical axis and DVDs
are measured on the horizontal axis, then the budget line intersects the vertical axis at:
A. 40.
B. 20.
C. 10.
D. 400.
5-3
$20 and the consumer's income is $400. If books are measured on the vertical axis and DVDs
are measured on the horizontal axis, then the slope of the budget line is:
A. 2.
B. -2.
C. 1/2.
D. -1/2.
10. An increase in a consumer's income will cause the budget line to:
A. shift outward.
B. shift inward.
C. become steeper.
D. become flatter.
11. An increase in the price of the good measured along the vertical axis will cause the budget
line to
A. shift outward.
B. shift inward.
C. become steeper.
D. become flatter.
5-4
12. Refer to Figure 5.1. In which graph does a shift from BL1 to BL2 represent an increase in the
consumer's income?
A. A
B. B
C. C
D. D
5-5
13. Refer to Figure 5.1. In which graph does a shift from BL1 to BL2 represent an increase in the
price of DVDs?
A. A
B. B
C. C
D. D
5-6
14. Refer to Figure 5.1. In which graph could a shift from BL1 to BL2 represent a doubling of the
prices of both Books and DVDs?
A. A
B. B
C. C
D. D
15. If all prices and income change by the same proportion:
A. the budget line shifts out.

B. the budget line shifts in.
C. the budget line rotates outward.
D. the budget line doesn't change.
5-7
16. Choices that do not exhaust the consumer's budget lie to the ______ of the budget line.
A. southwest
B. northeast
C. northwest
D. southeast
17. An increase in the price of the good measured on the horizontal axis will cause the budget line
to:
A. shift outward.
B. become steeper.
C. become flatter.
D. shift inward.
18. Refer to Table 5.1, which shows Madeline's preference ranking for various consumption
bundles of bread and soup, where 1 represents her first choice, 2 her second, and so on. If the
price of soup is $3 per bowl, the price of bread is $3 per loaf and Madeline's income is $9 per
day, which combination of bread and soup will she choose?
A. 2 loaves of bread and 1 bowl of soup

B. 1 loaf of bread and 2 bowls of soup
C. 3 loaves of bread and 0 bowls of soup
D. 0 loaves of bread and 3 bowls of soup
5-8
19. When the consumer has found the best affordable bundle of goods:
A. the area above the indifference curve that runs through the consumer's best bundle does
not overlap with the area below the budget line.
B. the area above the indifference curve that runs through the consumer's best bundle does
not overlap with the area above the budget line.
C. the area above the indifference curve that runs through the consumer's best bundle should
overlap with the area below the budget line.
D. the area above the indifference curve that runs through any bundle other than the
consumer's best bundle does not overlap with the area below the budget line.
20. Refer to Figure 5.3. Which of the following statements is false?
A. Points a, b and c all represent best choices for the consumer.

B. It is possible for the consumer to afford better bundles than a.
C. Point b satisfies the tangency condition.
D. It is possible for the consumer to afford better bundles than c.
5-9
21. An affordable consumption bundle is an interior choice if:
A. it lies below the budget line.

B. for each good, there are affordable bundles containing a little bit more of that good and a
little bit less of it.
C. for each good, there are no other affordable bundles containing a little bit more of that good
and a little bit less of it.
D. it exhausts the consumer's income.
22. Which of the following statements is true?
A. Corner solutions always satisfy the tangency condition.

B. Interior solutions may or may not satisfy the tangency condition.
C. Interior solutions always satisfy the tangency condition.
D. Whenever the consumer purchases good X but not good Y, then MRS XY ≤ PX/PY at the
chosen bundle.
23. If everyone in an economy buys and sells goods at market-wide prices:
A. people will pay the same prices, so everyone's marginal rate of substitution will be the
same.
B. people will pay the same prices, but will have different marginal rates of substitution.
C. people will pay different prices, but will have the same marginal rates of substitution.
D. people will pay different prices and therefore will have different marginal rates of
substitution.
24. Suppose that soup is measured on the horizontal axis and bread is measured on the vertical
axis. At an interior solution:
A. MRSSB = PS/PB.
B. MRSSB = - PS/PB.
C. MRSSB = PB/PS.
D. MRSSB = - PB/PS.
5-10
25. Hailey's income is $40 per week. She spends all of it on coffee (C) and doughnuts (D). Coffee
costs $2 per cup and doughnuts cost $1 each. Her marginal rate of substitution for coffee with
doughnuts is D/C. How many cups of coffee and how many doughnuts will she purchase each
week?
A. 15 cups of coffee and 10 doughnuts

B. 10 cups of coffee and 20 doughnuts
C. 20 cups of coffee and 10 doughnuts
D. 5 cups of coffee and 30 doughnuts
26. At a boundary choice:
A. the consumer purchases at least some of every good.

B. the consumer purchases no goods.
C. the consumer does not spend all of her income.
D. the consumer purchases some of at least one good but none of at least one other good.
5-11
27. Refer to Figure 5.4. Which consumption bundle would maximize the consumer's utility?
A. A
B. B
C. C
D. D
28. Boundary solutions arise when:
A. a good provides a consumer with little value per dollar relative to other alternatives.
B. a consumer has a very low level of income.
C. indifference curves are convex.
D. indifference curves exhibit increasing MRS.
29. Whenever a consumer purchases good X but not good Y, then:
A. MRSXY ≥ PX/PY at the chosen bundle.

B. MRSXY ≤ PX/PY at the chosen bundle.
C. MRSXY = PX/PY at the chosen bundle.
D. MRSXY = - PX/PY at the chosen bundle.
5-12
30. When indifference curves have ________ marginal rates of substitution, any interior choice that
satisfies the tangency condition is the best affordable choice.
A. constant
B. increasing
C. declining
D. positive
31. When the government provides food stamps to low-income households:
A. the household definitely purchases more food.

B. the household purchases less food.
C. purchases of food may increase or decrease.
D. the household's utility is greater than if they received cash aid.
32. A utility function is a mathematical function that assigns values to consumption bundles to
represent the:
A. consumer's income.
B. consumer's preferences.
C. marginal rate of substitution.
D. prices of the goods in the consumption bundle.
33. Which of the following conditions must hold if a consumer is maximizing her utility?
A. MUX × PX = MUY × PY
B. MUX = MUY
C. MUX/PY = MUY/PX
D. MUX/PX = MUY/PY
5-13
34. Mike's income is $600 per month. He spends all of it on books (B) and CDs (C). Books cost
$10 and CDs cost $15. His preferences correspond to the utility function U(B,C) = B × C. For
that utility function, the marginal benefit of books is C and the marginal benefit of CDs is B.
How many books and how many CDs will he purchase in a month?
A. 20 CDs and 30 Books

B. 60 CDs and 10 Books
C. 15 CDs and 40 Books
D. 30 CDs and 15 Books
35. The curve that shows how the best affordable consumption bundle changes as the price of a
good changes (holding the consumer's income, preferences and all other prices fixed) is
called:
A. a price-consumption curve.
B. an individual demand curve.
C. an income-consumption curve.
D. a budget line.
36. A curve that describes the relationship between the price of a good and the amount a
particular consumer purchases (holding the consumer's income, preferences and all other
prices fixed) is called:
D. a budget line.
5-14
37. Refer to Figure 5.5. Which diagram shows the price-consumption curve resulting from a
decrease in the price of good X?
A. A
B. B
C. C
D. D
5-15
38. Refer to Figure 5.5. Which diagram shows the income-consumption curve resulting from a
decrease in income?
A. A
B. B
C. C
D. D
39. When the price elasticity of demand is large in magnitude, a _____ increase in the price leads
to a _____ reduction in the amount purchased and the demand curve is relatively ____.
A. slight; substantial; steep

B. slight; slight; flat
C. large; slight; steep
D. slight; substantial; flat
5-16
40. When the price elasticity of demand is small in magnitude, a _____ increase in the price leads
to a _____ reduction in the amount purchased and the demand curve is relatively ____.

41. Suppose that books are measured on the horizontal axis and CDs are measured on the
vertical axis. As long as the law of demand holds for books, than an increase in the price of
books will generate a price-consumption curve that traces a path:
A. to the left.
B. to the right.
C. upward.
D. downward.
42. If two goods are substitutes, then an increase in the price of one will cause:
A. a leftward shift of the demand curve for the other good.

B. a rightward shift of the demand curve for the other good.
C. a movement up and to the left along the demand curve for the other good.
D. a movement down and to the right along the demand curve for the other good.
43. If an increase in the price of one good causes the demand curve for another good to shift to
the left, then the two goods are:
A. substitutes.
B. complements.
C. normal.
D. unrelated.
5-17
the right, then the two goods are:
A. substitutes.
B. complements.
C. normal.
D. unrelated.
45. If a change in the price of one good does not cause a shift in the demand curve of another
good, then the two goods are:
A. substitutes.
B. complements.
C. normal.
D. not related.
46. A curve that shows how the best available consumption bundle changes as income changes
(holding the consumer's preferences and all other prices fixed) is called:
D. a budget line.
47. If the income-consumption path slopes upward, then:
A. both goods are normal goods.

B. both goods are inferior goods.
C. the goods are substitutes.
D. the goods are complements.
5-18
48. If the income-consumption path slopes down, then:
A. both goods are inferior.

B. both goods are normal.
C. one good is normal and the other good is inferior.
D. we can't tell anything about whether the goods are normal or inferior.
49. Refer to Figure 5.6. Which diagram shows an increase in income with both bread and soup
being normal goods?
A. A
B. B
C. C
D. D
5-19
50. Refer to Figure 5.6. Which diagram shows an increase in income with bread being inferior and
soup being normal?
A. A
B. B
C. C
D. D
5-20
51. Refer to Figure 5.6. Which diagram shows a decrease in income with bread being normal and
soup being inferior?
A. A
B. B
C. C
D. D
A. No good can be inferior at all levels of income.

B. The income elasticity of demand is negative for normal goods.
C. It is possible for a good to be inferior at all income levels.
D. It is possible for all of the goods a consumer buys to be inferior.
5-21
53. A curve that describes the relationship between income and the amount of a good consumed
(holding the consumer's preferences and all other prices fixed) is called:
B. the Engel curve.
D. a budget line.
54. If a good is normal, then the Engel curve:
A. slopes upward.
B. slopes downward.
C. is vertical.
D. is horizontal.
5-22
55. Refer to Figure 5.7. Which diagram best represents an Engle curve where soup is a normal
good?
A. A
B. B
C. C
D. D
5-23
56. Refer to Figure 5.7. Which diagram best represents an income-consumption curve where soup
is a normal good?
A. A
B. B
C. C
D. D
5-24
57. Refer to Figure 5.7. Which diagram best represents an income-consumption curve where
bread is an inferior good?
A. A
B. B
C. C
D. D
5-25
58. When a good is normal:
A. an increase in income raises consumption at each price, so the demand curve shifts to the
left.
B. an increase in income raises consumption at each price, so the demand curve shifts to the
right.
C. a decrease in income lowers consumption at each price, so the demand curve shifts to the
right.
D. an increase in income lowers consumption at each price, so the demand curve shifts to the
left.
59. If the price of the good measured on the horizontal axis is subject to volume penalties, then:
A. the budget line will get steeper as the consumer moves along it from left to right.
B. the budget line will get flatter as the consumer moves along it from left to right.
C. the indifference curve will get steeper as the consumer moves along it from left to right.
D. the indifference curve will get flatter as the consumer moves along it from left to right.
60. If the price of the good measured on the horizontal axis is subject to volume discounts, then:
61. Which of the following goods is given in the textbook as an example of a good whose price is
subject to volume penalties?
A. Electricity
B. Pizza
C. Beer
D. Yogurt
5-26
62. Which of the following goods is given in the textbook as an example of a good whose price is
subject to volume discounts?
A. Electricity
B. Pizza
C. Gasoline
D. Yogurt
63. If a good's price is volume sensitive, the consumer will:
A. choose the bundle on the budget line that lies on the lowest indifference curve.
B. choose the bundle on the budget line where the budget line is "kinked."
C. choose a boundary solution.
D. choose the bundle on the budget line that lies on the highest indifference curve.
64. If electricity is measured on the horizontal axis, and the price of electricity becomes more
expensive beyond 500 kilowatts, we draw:
A. an indifference curve that becomes flatter at 500 kilowatts.

B. a budget constraint that is kinked at 500 kilowatts.
C. a budget constraint that becomes steeper at 500 kilowatts.
D. an Engle curve that becomes negatively-sloped at 500 kilowatts.
65. In the United States, some state governments set tiered prices for electricity. These tiered
prices lead to budget lines that are:
A. upward-sloping.
B. kinked.
C. horizontal at a specific level of electricity consumption.
D. vertical at a specific level of electricity consumption.
5-27
66. The revealed preference approach refers to:
A. asking consumer to reveal their preferences using survey methods.

B. estimating demand curves by using data on individual consumers.
C. a statistical method used to estimate demand curves.
D. a method of gathering information about consumer's preferences by observing their actual
choices.
67. Which of the following is NOT given in the text as a problem with using surveys to determine
consumer preferences?
A. Subjects are asked to imagine choices that they do not actually face, and few people take
hypothetical questions as seriously as they would actual choices.
B. Some people have difficulty forecasting their own behavior.
C. People may answer with what they think they ought to do, not what they think they actually
would do.
D. Many people maliciously try to tamper with survey results by giving false answers.
68. One consumption bundle is revealed preferred to a second bundle if:
A. a consumer voluntarily chooses it over the second bundle.

B. surveys reveal that consumers are more likely to choose it than the second bundle.
C. it is cheaper than the second bundle.
D. it lies on a higher indifference curve than the second bundle.
Essay Questions
5-28
69. Using carefully-labeled graphs, explain how an individual demand curve is derived from the
utility-maximizing behavior of a consumer.
70. The price of CDs is $15 and the price of pizzas is $10. Derek spends all of his income buying 2
CDs and 6 pizzas per week (and nothing else). Determine Derek's income, draw his budget
line and represent his utility-maximizing point using an indifference curve.
71. Suppose that steak is a normal good and vegetables are inferior goods. Using a carefully-
labeled diagram, illustrate the income-consumption curve that would result from an increase
in a consumer's income.
5-29
72. Suppose that an individual consumes just hamburgers and soft drinks. Using a carefully-
labeled diagram, derive the price-consumption curve that would result from a decrease in the
price of hamburgers.
73. Using a carefully-labeled diagram, explain an Engel curve for a good that is initially a normal
good, but eventually becomes an inferior good.
74. Nicole's income is $1,000 per month. She spends all of it on shoes (S) and books (B). Shoes
cost $50 and books cost $25. Her marginal rate of substitution for shoes with books is MRS SB
= 2B/3S. Illustrate her utility-maximizing combination of shoes and books and draw her price-
consumption curve if the price of books rises to $30.
5-30
75. Stewie spends all of his income on movie rentals (R) and noodles (N). His marginal rate of
substitution for rentals with noodles is given by MRS RN = 20/√R. Suppose that movies rent for
$2 and noodles cost $1. Plot his income-consumption curve, his Engle curve for movie rentals
and his Engel curve for noodles.
5-31
Chapter 05 Constraints, Choices, and Demand Answer Key
Multiple Choice Questions
1. A consumer's budget constraint is determined by:
A. a consumer's income.
B. a consumer's income and preferences.
C. a consumer's income and the prices of the goods she buys.
D. a consumer's preferences and the prices of the goods she buys.
AACSB: Reflective Thinking

Blooms: Remember
Difficulty: 1 Easy
Topic: Affordable Consumption Bundles
2. A consumer's budget constraint is:
A. a positively-sloped line.
B. a negatively-sloped line.
C. convex.
D. a vertical line at the level of the consumer's income.

Blooms: Remember
Difficulty: 1 Easy
5-32
3. Suppose a consumer purchases pizza and soft drinks. If pizza is measured on the vertical
axis and soft drinks are measured on the horizontal axis, then the slope of the budget line
is equal to:
A. the price of pizza divided by the price of soft drinks.

B. the price of soft drinks divided by the price of pizza.
C. the price of pizza divided by the price of soft drinks times negative one.
D. the price of soft drinks divided by the price of pizza times negative one.
AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
4. Consumption bundles that lie above the boundary established by the budget line:
A. are affordable for the consumer.

B. are preferred by the consumer but are not affordable.
C. are not preferred by the consumer.
D. do not exhaust the consumer's income.

Blooms: Remember
Difficulty: 1 Easy
5-33
5. Terry buys 10 pounds of cheese and 12 boxes of crackers each month. A pound of cheese
costs $5 and a box of crackers costs $3. If she is maximizing her utility, what is her monthly
income?
A. $86
B. $90
C. $80
D. There is not enough information to determine her monthly income.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
6. The price of bread is $1.50 per pound and the price of butter is $3 per pound. Steve has an
income of $30, with which he buys 4 pounds of bread. How many pounds of butter does he
buy, assuming he buys nothing else and he maximizes his utility?
A. 8
B. 12
C. 4
D. There is not enough information to answer the question.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
5-34
7. Suppose a consumer buys pizza (P) and soft drinks (S). The price of pizza is $10, the price
of soft drinks is $2 and the consumer's income is $100. If pizza is measured on the vertical
axis and soft drinks are measured on the horizontal axis, then the consumer's budget
constraint is given by:
A. P = 10 - (1/5)S
B. S = 10 - (1/5)P
C. P = 100 - 5S
D. P = 10 - 5S
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
$20 and the consumer's income is $400. If books are measured on the vertical axis and
DVDs are measured on the horizontal axis, then the budget line intersects the vertical axis
at:
A. 40.
B. 20.
C. 10.
D. 400.
AACSB: Analytic
Blooms: Understand
5-35
$20 and the consumer's income is $400. If books are measured on the vertical axis and
DVDs are measured on the horizontal axis, then the slope of the budget line is:
A. 2.
B. -2.
C. 1/2.
D. -1/2.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
10. An increase in a consumer's income will cause the budget line to:
A. shift outward.
B. shift inward.
C. become steeper.
D. become flatter.

Blooms: Remember
Difficulty: 1 Easy
5-36
11. An increase in the price of the good measured along the vertical axis will cause the budget
line to
A. shift outward.
B. shift inward.
C. become steeper.
D. become flatter.

Blooms: Remember
Difficulty: 1 Easy
5-37
12. Refer to Figure 5.1. In which graph does a shift from BL1 to BL2 represent an increase in
the consumer's income?
A. A
B. B
C. C
D. D

Blooms: Remember
Difficulty: 1 Easy
5-38
13. Refer to Figure 5.1. In which graph does a shift from BL1 to BL2 represent an increase in
the price of DVDs?
A. A
B. B
C. C
D. D

Blooms: Remember
Difficulty: 1 Easy
5-39
14. Refer to Figure 5.1. In which graph could a shift from BL1 to BL2 represent a doubling of
the prices of both Books and DVDs?
A. A
B. B
C. C
D. D

Blooms: Remember
Difficulty: 1 Easy
5-40
15. If all prices and income change by the same proportion:
A. the budget line shifts out.

B. the budget line shifts in.
C. the budget line rotates outward.
D. the budget line doesn't change.

Blooms: Remember
Difficulty: 1 Easy
16. Choices that do not exhaust the consumer's budget lie to the ______ of the budget line.
A. southwest
B. northeast
C. northwest
D. southeast

Blooms: Remember
Difficulty: 1 Easy
17. An increase in the price of the good measured on the horizontal axis will cause the budget
line to:
A. shift outward.
B. become steeper.
C. become flatter.
D. shift inward.

Blooms: Remember
Difficulty: 1 Easy
5-41
18. Refer to Table 5.1, which shows Madeline's preference ranking for various consumption
bundles of bread and soup, where 1 represents her first choice, 2 her second, and so on. If
the price of soup is $3 per bowl, the price of bread is $3 per loaf and Madeline's income is
$9 per day, which combination of bread and soup will she choose?
A. 2 loaves of bread and 1 bowl of soup

B. 1 loaf of bread and 2 bowls of soup
C. 3 loaves of bread and 0 bowls of soup
D. 0 loaves of bread and 3 bowls of soup
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
Topic: Consumer Choice
19. When the consumer has found the best affordable bundle of goods:
A. the area above the indifference curve that runs through the consumer's best bundle
does not overlap with the area below the budget line.
B. the area above the indifference curve that runs through the consumer's best bundle
does not overlap with the area above the budget line.
C. the area above the indifference curve that runs through the consumer's best bundle
should overlap with the area below the budget line.
D. the area above the indifference curve that runs through any bundle other than the
consumer's best bundle does not overlap with the area below the budget line.
AACSB: Analytic
Blooms: Understand
5-42
20. Refer to Figure 5.3. Which of the following statements is false?
A. Points a, b and c all represent best choices for the consumer.

B. It is possible for the consumer to afford better bundles than a.
C. Point b satisfies the tangency condition.
D. It is possible for the consumer to afford better bundles than c.
AACSB: Analytic
Blooms: Understand
5-43
21. An affordable consumption bundle is an interior choice if:
A. it lies below the budget line.

B. for each good, there are affordable bundles containing a little bit more of that good and
a little bit less of it.
C. for each good, there are no other affordable bundles containing a little bit more of that
good and a little bit less of it.
D. it exhausts the consumer's income.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
A. Corner solutions always satisfy the tangency condition.

B. Interior solutions may or may not satisfy the tangency condition.
C. Interior solutions always satisfy the tangency condition.
D. Whenever the consumer purchases good X but not good Y, then MRS XY ≤ PX/PY at the
chosen bundle.
AACSB: Analytic
Blooms: Understand
5-44
23. If everyone in an economy buys and sells goods at market-wide prices:
A. people will pay the same prices, so everyone's marginal rate of substitution will be the
same.
B. people will pay the same prices, but will have different marginal rates of substitution.
C. people will pay different prices, but will have the same marginal rates of substitution.
D. people will pay different prices and therefore will have different marginal rates of
substitution.
AACSB: Analytic
Blooms: Understand
24. Suppose that soup is measured on the horizontal axis and bread is measured on the
vertical axis. At an interior solution:
A. MRSSB = PS/PB.
B. MRSSB = - PS/PB.
C. MRSSB = PB/PS.
D. MRSSB = - PB/PS.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
5-45
25. Hailey's income is $40 per week. She spends all of it on coffee (C) and doughnuts (D).
Coffee costs $2 per cup and doughnuts cost $1 each. Her marginal rate of substitution for
coffee with doughnuts is D/C. How many cups of coffee and how many doughnuts will she
purchase each week?
A. 15 cups of coffee and 10 doughnuts

B. 10 cups of coffee and 20 doughnuts
C. 20 cups of coffee and 10 doughnuts
D. 5 cups of coffee and 30 doughnuts
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
26. At a boundary choice:
A. the consumer purchases at least some of every good.

B. the consumer purchases no goods.
C. the consumer does not spend all of her income.
D. the consumer purchases some of at least one good but none of at least one other good.

Blooms: Remember
Difficulty: 1 Easy
5-46
27. Refer to Figure 5.4. Which consumption bundle would maximize the consumer's utility?
A. A
B. B
C. C
D. D
AACSB: Analytic
Blooms: Understand
28. Boundary solutions arise when:
A. a good provides a consumer with little value per dollar relative to other alternatives.
B. a consumer has a very low level of income.
C. indifference curves are convex.
D. indifference curves exhibit increasing MRS.
AACSB: Analytic
Blooms: Understand
5-47
29. Whenever a consumer purchases good X but not good Y, then:
A. MRSXY ≥ PX/PY at the chosen bundle.

B. MRSXY ≤ PX/PY at the chosen bundle.
C. MRSXY = PX/PY at the chosen bundle.
D. MRSXY = - PX/PY at the chosen bundle.

Blooms: Remember
Difficulty: 1 Easy
30. When indifference curves have ________ marginal rates of substitution, any interior choice
that satisfies the tangency condition is the best affordable choice.
A. constant
B. increasing
C. declining
D. positive

Blooms: Remember
Difficulty: 1 Easy
31. When the government provides food stamps to low-income households:
A. the household definitely purchases more food.

B. the household purchases less food.
C. purchases of food may increase or decrease.
D. the household's utility is greater than if they received cash aid.
AACSB: Analytic
Blooms: Understand
5-48
32. A utility function is a mathematical function that assigns values to consumption bundles to
represent the:
A. consumer's income.
B. consumer's preferences.
C. marginal rate of substitution.
D. prices of the goods in the consumption bundle.

Blooms: Remember
Difficulty: 1 Easy
33. Which of the following conditions must hold if a consumer is maximizing her utility?
A. MUX × PX = MUY × PY
B. MUX = MUY
C. MUX/PY = MUY/PX
D. MUX/PX = MUY/PY

Blooms: Remember
Difficulty: 1 Easy
5-49
34. Mike's income is $600 per month. He spends all of it on books (B) and CDs (C). Books cost
$10 and CDs cost $15. His preferences correspond to the utility function U(B,C) = B × C.
For that utility function, the marginal benefit of books is C and the marginal benefit of CDs
is B. How many books and how many CDs will he purchase in a month?
A. 20 CDs and 30 Books

B. 60 CDs and 10 Books
C. 15 CDs and 40 Books
D. 30 CDs and 15 Books
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
35. The curve that shows how the best affordable consumption bundle changes as the price of
a good changes (holding the consumer's income, preferences and all other prices fixed) is
called:
D. a budget line.

Blooms: Remember
Difficulty: 1 Easy
Topic: Prices and Demand
5-50
36. A curve that describes the relationship between the price of a good and the amount a
particular consumer purchases (holding the consumer's income, preferences and all other
prices fixed) is called:
D. a budget line.

Blooms: Remember
Difficulty: 1 Easy
5-51
37. Refer to Figure 5.5. Which diagram shows the price-consumption curve resulting from a
decrease in the price of good X?
A. A
B. B
C. C
D. D

Blooms: Remember
Difficulty: 1 Easy
5-52
38. Refer to Figure 5.5. Which diagram shows the income-consumption curve resulting from a
decrease in income?
A. A
B. B
C. C
D. D

Blooms: Remember
Difficulty: 1 Easy
Topic: Income and Demand
5-53
39. When the price elasticity of demand is large in magnitude, a _____ increase in the price
leads to a _____ reduction in the amount purchased and the demand curve is relatively
____.

AACSB: Analytic
Blooms: Understand
40. When the price elasticity of demand is small in magnitude, a _____ increase in the price
leads to a _____ reduction in the amount purchased and the demand curve is relatively
____.

AACSB: Analytic
Blooms: Understand
5-54
41. Suppose that books are measured on the horizontal axis and CDs are measured on the
vertical axis. As long as the law of demand holds for books, than an increase in the price of
books will generate a price-consumption curve that traces a path:
A. to the left.
B. to the right.
C. upward.
D. downward.
AACSB: Analytic
Blooms: Understand
42. If two goods are substitutes, then an increase in the price of one will cause:
A. a leftward shift of the demand curve for the other good.

B. a rightward shift of the demand curve for the other good.
C. a movement up and to the left along the demand curve for the other good.
D. a movement down and to the right along the demand curve for the other good.

Blooms: Remember
Difficulty: 1 Easy
5-55
the left, then the two goods are:
A. substitutes.
B. complements.
C. normal.
D. unrelated.

Blooms: Remember
Difficulty: 1 Easy
the right, then the two goods are:
A. substitutes.
B. complements.
C. normal.
D. unrelated.

Blooms: Remember
Difficulty: 1 Easy
5-56
45. If a change in the price of one good does not cause a shift in the demand curve of another
good, then the two goods are:
A. substitutes.
B. complements.
C. normal.
D. not related.

Blooms: Remember
Difficulty: 1 Easy
46. A curve that shows how the best available consumption bundle changes as income
changes (holding the consumer's preferences and all other prices fixed) is called:
D. a budget line.

Blooms: Remember
Difficulty: 1 Easy
47. If the income-consumption path slopes upward, then:
A. both goods are normal goods.

B. both goods are inferior goods.
C. the goods are substitutes.
D. the goods are complements.
AACSB: Analytic
Blooms: Understand
5-57
48. If the income-consumption path slopes down, then:
A. both goods are inferior.

B. both goods are normal.
C. one good is normal and the other good is inferior.
D. we can't tell anything about whether the goods are normal or inferior.
AACSB: Analytic
Blooms: Understand
5-58
49. Refer to Figure 5.6. Which diagram shows an increase in income with both bread and soup
being normal goods?
A. A
B. B
C. C
D. D
AACSB: Analytic
Blooms: Analyze
Difficulty: 3 Hard
5-59
50. Refer to Figure 5.6. Which diagram shows an increase in income with bread being inferior
and soup being normal?
A. A
B. B
C. C
D. D
AACSB: Analytic
Blooms: Analyze
Difficulty: 3 Hard
5-60
51. Refer to Figure 5.6. Which diagram shows a decrease in income with bread being normal
and soup being inferior?
A. A
B. B
C. C
D. D
AACSB: Analytic
Blooms: Analyze
Difficulty: 3 Hard
5-61
A. No good can be inferior at all levels of income.

B. The income elasticity of demand is negative for normal goods.
C. It is possible for a good to be inferior at all income levels.
D. It is possible for all of the goods a consumer buys to be inferior.

Blooms: Remember
Difficulty: 1 Easy
53. A curve that describes the relationship between income and the amount of a good
consumed (holding the consumer's preferences and all other prices fixed) is called:
B. the Engel curve.
D. a budget line.

Blooms: Remember
Difficulty: 1 Easy
54. If a good is normal, then the Engel curve:
A. slopes upward.
B. slopes downward.
C. is vertical.
D. is horizontal.

Blooms: Remember
Difficulty: 1 Easy
5-62
55. Refer to Figure 5.7. Which diagram best represents an Engle curve where soup is a normal
good?
A. A
B. B
C. C
D. D
AACSB: Analytic
Blooms: Analyze
Difficulty: 3 Hard
5-63
soup is a normal good?
A. A
B. B
C. C
D. D
AACSB: Analytic
Blooms: Analyze
Difficulty: 3 Hard
5-64
bread is an inferior good?
A. A
B. B
C. C
D. D
AACSB: Analytic
Blooms: Analyze
Difficulty: 3 Hard
5-65
58. When a good is normal:
A. an increase in income raises consumption at each price, so the demand curve shifts to
the left.
B. an increase in income raises consumption at each price, so the demand curve shifts to
the right.
C. a decrease in income lowers consumption at each price, so the demand curve shifts to
the right.
D. an increase in income lowers consumption at each price, so the demand curve shifts to
the left.
AACSB: Analytic
Blooms: Understand
59. If the price of the good measured on the horizontal axis is subject to volume penalties,
then:
AACSB: Analytic
Blooms: Understand
Topic: Volume-Sensitive Pricing
5-66
60. If the price of the good measured on the horizontal axis is subject to volume discounts,
then:
AACSB: Analytic
Blooms: Understand
61. Which of the following goods is given in the textbook as an example of a good whose price
is subject to volume penalties?
A. Electricity
B. Pizza
C. Beer
D. Yogurt

Blooms: Remember
Difficulty: 1 Easy
5-67
62. Which of the following goods is given in the textbook as an example of a good whose price
is subject to volume discounts?
A. Electricity
B. Pizza
C. Gasoline
D. Yogurt

Blooms: Remember
Difficulty: 1 Easy
63. If a good's price is volume sensitive, the consumer will:
A. choose the bundle on the budget line that lies on the lowest indifference curve.
B. choose the bundle on the budget line where the budget line is "kinked."
C. choose a boundary solution.
D. choose the bundle on the budget line that lies on the highest indifference curve.
AACSB: Analytic
Blooms: Understand
64. If electricity is measured on the horizontal axis, and the price of electricity becomes more
expensive beyond 500 kilowatts, we draw:
A. an indifference curve that becomes flatter at 500 kilowatts.

B. a budget constraint that is kinked at 500 kilowatts.
C. a budget constraint that becomes steeper at 500 kilowatts.
D. an Engle curve that becomes negatively-sloped at 500 kilowatts.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
5-68
65. In the United States, some state governments set tiered prices for electricity. These tiered
prices lead to budget lines that are:
A. upward-sloping.
B. kinked.
C. horizontal at a specific level of electricity consumption.
D. vertical at a specific level of electricity consumption.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
Topic: How Economists Determine a Consumer's Preferences
66. The revealed preference approach refers to:
A. asking consumer to reveal their preferences using survey methods.

B. estimating demand curves by using data on individual consumers.
C. a statistical method used to estimate demand curves.
D. a method of gathering information about consumer's preferences by observing their
actual choices.

Blooms: Remember
Difficulty: 1 Easy
5-69
67. Which of the following is NOT given in the text as a problem with using surveys to
determine consumer preferences?
A. Subjects are asked to imagine choices that they do not actually face, and few people
take hypothetical questions as seriously as they would actual choices.
B. Some people have difficulty forecasting their own behavior.
C. People may answer with what they think they ought to do, not what they think they
actually would do.
D. Many people maliciously try to tamper with survey results by giving false answers.

Blooms: Remember
Difficulty: 1 Easy
68. One consumption bundle is revealed preferred to a second bundle if:
A. a consumer voluntarily chooses it over the second bundle.

B. surveys reveal that consumers are more likely to choose it than the second bundle.
C. it is cheaper than the second bundle.
D. it lies on a higher indifference curve than the second bundle.
AACSB: Analytic
Blooms: Understand
Essay Questions
5-70
69. Using carefully-labeled graphs, explain how an individual demand curve is derived from the
utility-maximizing behavior of a consumer.
Refer to Figure 5.8. The left panel of Figure 5.8 represents the utility-maximizing behavior
of a consumer. When income is M, the price of good Y is Py1 and the price of good X is
Px1, the consumer's budget constraint is represented by the budget line labeled L1. The
consumer maximizes their utility by choosing the bundle labeled a, where indifference
curve U1 is tangent to budget line L1. Therefore, at a price of Px1, the consumer chooses
to consumer X1 units of good X. This price and quantity combination is represented by
point a in the right-hand panel of Figure 5.8. Now suppose the price of good X falls to Px2,
causing the budget line to rotate out to L2. The consumer now maximizes their utility at
point b, where indifference curve U2 is tangent to the new budget line L2. At point b, the
consumer chooses to consume X2 units of good X. The price and quantity combination Px2
and X2 is represented by point b in the right-hand panel of Figure 5.8. Connecting the price
and quantity combinations a and b in the right-hand graph gives the individual demand
curve for good X.
AACSB: Analytic
Blooms: Analyze
Difficulty: 3 Hard
5-71
70. The price of CDs is $15 and the price of pizzas is $10. Derek spends all of his income
buying 2 CDs and 6 pizzas per week (and nothing else). Determine Derek's income, draw
his budget line and represent his utility-maximizing point using an indifference curve.
(2 CDs × $15) + (6 Pizzas × $10) = $90 of income. The utility-maximizing combination is

represented in Figure 5.9.
AACSB: Analytic
Blooms: Analyze
Difficulty: 3 Hard
5-72
71. Suppose that steak is a normal good and vegetables are inferior goods. Using a carefully-
labeled diagram, illustrate the income-consumption curve that would result from an
increase in a consumer's income.
See Figure 5.10. The consumer is initially consuming V1 units of vegetables and S1 units of
steak. An increase in income will cause the budget line to shift out from L1 to L2. The
consumer will now choose a bundle containing V2 units of vegetables and S2 units of
steak. Connecting the two utility-maximizing bundles gives the income-consumption curve.
AACSB: Analytic
Blooms: Analyze
Difficulty: 3 Hard
5-73
72. Suppose that an individual consumes just hamburgers and soft drinks. Using a carefully-
labeled diagram, derive the price-consumption curve that would result from a decrease in
the price of hamburgers.
See Figure 5.11. The initial budget line is given by L1, where the consumer chooses H1
units of hamburgers. A decrease in the price of hamburgers will cause the budget line to
pivot to L2. The consumer now chooses to consume H2 units of hamburgers. Connecting
the two utility-maximizing bundles yields the price consumption curve.
AACSB: Analytic
Blooms: Analyze
Difficulty: 3 Hard
5-74
73. Using a carefully-labeled diagram, explain an Engel curve for a good that is initially a
normal good, but eventually becomes an inferior good.
An Engel curve shows the relationship between income and the amount of a good
consumed, holding everything else constant. If a good is normal, then an increase in
income will cause more of the good to be consumed. Therefore, the Engel curve will be
positively-sloped. This is shown by the segment labeled ab in Figure 5.12. If a good is
inferior, then an increase in income will cause less of the good to be consumed, so the
Engle curve is negatively-sloped. This is shown be the segment labeled bc in Figure 5.12.
AACSB: Analytic
Blooms: Analyze
Difficulty: 3 Hard
5-75
74. Nicole's income is $1,000 per month. She spends all of it on shoes (S) and books (B).
Shoes cost $50 and books cost $25. Her marginal rate of substitution for shoes with books
is MRSSB = 2B/3S. Illustrate her utility-maximizing combination of shoes and books and
draw her price-consumption curve if the price of books rises to $30.
At the utility-maximizing combination of shoes and books, MRSSB = 2B/3S = PS/PB =

$50/$25, which implies that B = 3S. Substituting this into the budget constraint yields $50S
+ $75S = $1,000. Solving this equation gives S = 8. Since B = 3S, B = 24. Her initial utility-
maximizing combination of shoes and books is represented by point a in Figure 5.13.
To find the price-consumption curve, start with the utility-maximizing condition and solve
for S. 2B/3S = PS/PB, which implies that S = (2/3)(PB/PS)B. Substitute this into the budget
constraint and solve for B. M = PS (2/3)(PB/PS)B + PBB, which implies B = (3/5) (M/PB ) =
B. When PB = $30, B = 20. The new utility-maximizing combination of books and shoes is
represented by point b in Figure 5.13. Connecting points a and b gives the price-
consumption curve.
5-76
AACSB: Analytic
Blooms: Analyze
Difficulty: 3 Hard
75. Stewie spends all of his income on movie rentals (R) and noodles (N). His marginal rate of
substitution for rentals with noodles is given by MRS RN = 20/√R. Suppose that movies rent
for $2 and noodles cost $1. Plot his income-consumption curve, his Engle curve for movie
rentals and his Engel curve for noodles.
Start with the utility maximizing condition 20/√R = PR/PN = $2/$1. Solving for R yields R =
100, implying Stewie spends $200 on movie rentals. That means he spends $2(M-200) on
noodles. So, for income levels less than $200, Stewie only rents movies. His income-
consumption curve, his Engle curve for movie rentals and his Engel curve for noodles are
shown in Figure 5.14.
AACSB: Analytic
Blooms: Analyze
Difficulty: 3 Hard
5-77

Microeconomics 2nd Edition Bernheim Test Bank 1

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Microeconomics 2nd Edition Bernheim Test Bank 1

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Test bank for Microeconomics 2nd Edition

Bernheim Whinston 0073375853 9780073375854

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Constraints, Choices, and Demand

Multiple Choice Questions

1. A consumer's budget constraint is determined by:

A. the price of pizza divided by the price of soft drinks.

A. are affordable for the consumer.

15. If all prices and income change by the same proportion:

A. the budget line shifts out.

A. 2 loaves of bread and 1 bowl of soup

20. Refer to Figure 5.3. Which of the following statements is false?

A. Points a, b and c all represent best choices for the consumer.

A. it lies below the budget line.

22. Which of the following statements is true?

A. Corner solutions always satisfy the tangency condition.

23. If everyone in an economy buys and sells goods at market-wide prices:

A. 15 cups of coffee and 10 doughnuts

26. At a boundary choice:

A. the consumer purchases at least some of every good.

28. Boundary solutions arise when:

29. Whenever a consumer purchases good X but not good Y, then:

A. MRSXY ≥ PX/PY at the chosen bundle.

31. When the government provides food stamps to low-income households:

A. the household definitely purchases more food.

A. 20 CDs and 30 Books

A. slight; substantial; steep

A. slight; substantial; steep

A. a leftward shift of the demand curve for the other good.

47. If the income-consumption path slopes upward, then:

A. both goods are normal goods.

A. both goods are inferior.

52. Which of the following statements is true?

A. No good can be inferior at all levels of income.

54. If a good is normal, then the Engel curve:

63. If a good's price is volume sensitive, the consumer will:

A. an indifference curve that becomes flatter at 500 kilowatts.

A. asking consumer to reveal their preferences using survey methods.

68. One consumption bundle is revealed preferred to a second bundle if:

A. a consumer voluntarily chooses it over the second bundle.

Multiple Choice Questions

1. A consumer's budget constraint is determined by:

AACSB: Reflective Thinking

2. A consumer's budget constraint is:

AACSB: Reflective Thinking

A. the price of pizza divided by the price of soft drinks.

A. are affordable for the consumer.

AACSB: Reflective Thinking

AACSB: Reflective Thinking

AACSB: Reflective Thinking

AACSB: Reflective Thinking

AACSB: Reflective Thinking

AACSB: Reflective Thinking

A. the budget line shifts out.

AACSB: Reflective Thinking

AACSB: Reflective Thinking

AACSB: Reflective Thinking

A. 2 loaves of bread and 1 bowl of soup

A. Points a, b and c all represent best choices for the consumer.

A. it lies below the budget line.

22. Which of the following statements is true?

A. Corner solutions always satisfy the tangency condition.

A. 15 cups of coffee and 10 doughnuts

26. At a boundary choice: