TEST BANK FOR INTERMIDIATE MICROECONOMICS 9 TH EDITION Hal R. Varian Theodore C. Bergstrom James E. West CHAPTER 2 Bud get Constraint TRUE/FALSE 7. If there are two goods and the prices of both goods rise, then the bud get line must become steeper. 1. If there are two goods with positive prices and the price of one good is reduced, while income and other prices remain constant, then the size of the bud get set is reduced. ANS: F DIF: 1 8. There are two goods. You know how much of good 1 a consumer can afford if she spends all of her income on good 1. If you knew the ratio of the prices of the two goods, then you could draw the consumer’s bud get line without any more information. ANS: T DIF: 1 9. A consumer prefers more to less of every good. cents d. 85 cents e. None of the above. ANS: B DIF: 1 14. Eduardo spends his entire income on 9 sacks of acorns and 4 crates of butternuts. The price of acorns is 6 dollars per sack and his income is 90 dollars. He can just afford a commodity bundle with A sacks of acorns and B crates of butternuts that satisfi es the budget equation a. 6A + 13B = 92. b. 12A + 18B = 180. c. 8A + 9B = 90. d. 6A + 11B = 90. e. None of the above. ANS: B DIF: 1 15. Harry thrives on two goods, paperback novels and bananas. The cost of paperback novels is 4 dollars each and the cost of bananas is 3 dollars per bunch. If Harry spent all of his income on bananas, he could afford 12 bunches of bananas per week. How many paperback novels could he buy if he spent all of his income on paperback novels? a. 36 b. 48 c. 9 d. 16 e. None of the above. ANS: C DIF: 1 16. Suppose that the prices of good x and good y both double and income triples. On a graph where the bud get line is drawn with x on the horizontal axis and y on the vertical axis, a. the bud get line becomes steeper and shifts inward. b. the bud get line becomes fl atter and shifts outward. c. the bud get line becomes fl atter and shifts inward. ANS: D DIF: 1 10. If she spends her entire bud get, Heidi can afford 39 peaches and 12 pears. She can also just afford 24 peaches and 17 pears. The price of peaches is 9 cents. What is the price of pears in cents? a. 12 cents b. 37 cents c. 27 cents d. 3 cents e. None of the above. ANS: C DIF: 1 11. Isabella thrives on two goods: lemons and tangerines. The cost of lemons is 40 guineas each and the cost of tangerines is 20 guineas each. If her income is 320 guineas, how many lemons can she buy if she spends all of her income on lemons? a. 6 b. 8 c. 16 d. 11 e. None of the above. ANS: B DIF: 1 d. the new bud get line is parallel to the old bud get line and lies below it. e. None of the above. ANS: E DIF: 1 12. Georgina thrives on two goods: pears and bananas. The cost of pears is 30 pesos each and the cost of bananas is 15 pesos each. If her income is 180 pesos, how many pears can she buy if she spends all of her income on pears? a. 9 b. 12 c. 4 d. 6 e. None of the above. 17. Suppose goods, if a consumer prefers more of each good to less, and if she has a diminishing marginal rate of substitution, then her preferences are convex. ANS: T DIF: 2 7. If preferences are convex, then for any commodity bundle x, the set of commodity bundles that are worse than x is a convex set. ANS: F DIF: 2 ANS: F DIF: 1 12. If Melody has more classical rec ords than rock and roll rec ords, she is willing to exchange exactly 1 classical record for 2 rock and roll rec ords, but if she has more rock and roll rec ords than classical rec ords, then she is willing to exchange exactly 1 rock and roll record for 2 classical rec ords. Melody has convex preferences. ANS: F DIF: 3 13. Josephine buys 3 quarts of milk and 2 pounds of butter when milk sells for $2 a quart and butter sells for $1 a pound. Wilma buys 2 quarts of milk and 3 pounds of butter at the same prices. Josephine’s marginal rate of 11Chapter 3 substitution between milk and butter is greater than Wilma’s. d. Steven’s preferences are not complete. e. More than one of the above statements are true. ANS: C DIF: 1 5. Tim consumes only apples and bananas. He prefers more apples to fewer, but he gets tired of bananas. If he consumes fewer than 29 bananas per week, he thinks that 1 banana is a perfect substitute for 1 apple. But you would have to pay him 1 apple for each banana beyond 29 that he consumes. The indifference curve that passes through the consumption bundle with 30 apples and 39 bananas also passes through the bundle with A apples and 21 bananas, where A equals a. 25. b. 28. c. 34. d. 36. e. None of the above. ANS: B DIF: 1 6. Leo consumes only apples and bananas. He prefers more apples to fewer, but he gets tired of bananas. If he consumes fewer than 24 bananas per week, he thinks that 1 banana is a perfect substitute for 1 apple. But you would have to pay him 1 apple for each banana beyond 24 that he consumes. The indifference curve that passes through the consumption bundle with 31 apples and 36 bananas also passes through the bundle with A apples and 18 bananas, where A equals a. 29. b. 23. c. 31. d. 25. e. None of the above. ANS: D DIF: 1 7. If two goods are both desirable and preferences are convex, then a. there must be a kink in the indifference curves. b. indifference curves must be straight lines. c. if two bundles are indifferent, then an average of the two bundles is worse than either one. ANS: F DIF: 1 14. A consumer who is unable to detect small differences in the amount of water in her beer could have a transitive strict preference relation but is unlikely to have a transitive indifference relation. ANS: T DIF: 2 MULTIPLE CHOICE 1. Colette consumes goods x and y. Her indifference curves are described by the formula y = k/(x + 7). Higher values of k correspond to better indifference curves. a. Colette likes good y and hates good x. b. Colette prefers bundle (12, 16) to bundle (16, 12). c. Colette prefers bundle (8, 5) to bundle (5, 8). d. Colette likes good x and hates good y. e. More than one of the above statements are true. ANS: B DIF: 1 2. Angela consumes goods x and y. Her indifference curves are described by the formula y = k/(x + 3). Higher values of k correspond to better indifference curves. a. Angela prefers bundle (8, 9) to bundle (9, 8). b. Angela likes good y and hates good x. c. Angela prefers bundle (11, 9) to bundle (9, 11). d. Angela likes good x and hates good y. e. More than one of the above statements are true. ANS: A DIF: 1 3. Nick’s indifference curves are circles, all of which are centered at (12, 12). Of any two indifference circles, he would rather be on the inner one than the outer one. a. Nick’s preferences are not complete. b. Nick prefers (16, 17) to (10, 10). c. Nick prefers (10, 17) to (10, 10). d. Nick prefers (8, 8) to (17, 21). d. the marginal rate of substitution is constant along indifference curves. e. None of the above. ANS: E DIF: 1 8. If there are only two goods, if more of good 1 is always preferred to less, and if less of good 2 is always preferred to more, then indifference curves a. slope downward. b. slope upward. c. may cross. e. More than one of the above statements are true. ANS: D DIF: 1 4. Steven’s indifference curves are circles, all of which are centered at (15, 13). Of any two indifference circles, he would rather be on the inner one than the outer one. a. Steven prefers (19, 22) to (13, 7). b. Steven prefers (13, 22) to (13, 7). c. Steven prefers (12, 10) to (22, 18). 13. Professor Goodheart’s colleague Dr. Kremepuff gives 3 midterm exams. He drops the lowest score and gives d. could take the form of ellipses. each student her average score on the other two exams. Polly Sigh is taking his course and has a 60 on her fi rst exam. Let x be her score on the second exam and x 2 3 be her score on the third exam. If we draw her indifference curves for scores on the second and third exams with x represented by the horizontal axis and x 2 3 represented by the vertical axis, then her indifference curve through the point (x , x 2 3 e. None of the above. ANS: B DIF: 2 9. If two goods are perfect complements, a. there is a bliss point and the indifference curves surround this point. b. consumers will only buy the cheaper of the two goods. c. indifference curves have a positive slope. ) = (50, 70) is a. L-shaped with a kink where x = x 2 3 . b. three line segments, one vertical, one horizontal, and one running from (70, 60) to (60, 70). c. a straight line, running from (0, 120) to (120, 0). d. three line segments, one vertical, one horizontal, and one running from (70, 50) to (50, 70). e. a V-shaped curve with its point at (50, 70). ANS: B DIF: 3 14. Charlie’s indifference curves have the equation x = constant/x , where larger constants denote better B A indifference curves. Charlie strictly prefers the bundle (6, 16) to a. the bundle (16, 6). b. the bundle (7, 15). c. the bundle (10, 11). d. more than one of these bundles. e. none of these bundles. ANS: E 15. Charlie’s indifference curves have the equation x = constant/x where larger constants denote better B A d. None of the above. ANS: D DIF: 2 10. The relation “is preferred to” between commodity bundles is just one example of a binary relation. Another example is the relation “is a full brother of” defi ned over the set of all human beings. Let xRy mean person x is a full brother of person y. a. The relation R is refl exive, transitive, and complete. b. The relation R is transitive and complete but not refl exive. c. The relation R is transitive but not complete or refl exive. d. The relation R is complete but not transitive or refl exive. e. The relation R is not refl exive, transitive, or complete. ANS: C DIF: 2 11. Preferences are said to be monotonic if a. all goods must be consumed in fi xed proportions. b. all goods are perfect substitutes. c. more is always preferred to less. indifference curves. Charlie strictly prefers the bundle (10, 17) to a. the bundle (11, 16). b. the bundle (17, 10). c. the bundle (12, 15). d. there is a diminishing marginal rate of substitution. d. more than one of these bundles. e. none of these bundles. ANS: E 16. Ambrose has indifference curves with the equation x = constant − 4x 1/2 1 , where larger constants corre- 2 e. None of the above. ANS: C DIF: 1 12. Toby Talkalot subscribes to a local phone ser vice that charges a fi xed fee of $10 per month and allows him to place as many local phone calls as he likes without further charge. Let good 1 be an aggregate of commodities other than local phone use and let good 2 be local phone use. (Mea sure good 1 on the horizontal axis and good 2 on the vertical axis.) On Monday, Toby didn’t use the telephone at all. The slope m of his indifference curve at the consumption bundle he chose on Monday was a. positive. b. less than or equal to 0. c. 0. spond to higher indifference curves. If good 1 is drawn on the horizontal axis and good 2 on the vertical axis, what is the slope of Ambrose’s indifference curve when his consumption bundle is (16, 17)? a. −16/17 b. −17/16 c. −0.50 d. −21 e. −4 d. greater than or equal to 0. e. negative. ANS: C DIF: 2 ANS: C DIF: 3 17. Ambrose has indifference curves with the equation x2 = constant − 4x than avocados, the slope of her indifference curve is 22. Whenever she has more avocados than grapefruits, the slope is 21/2. Mary would be indifferent between a bundle with 22 avocados and 37 grapefruits and another bundle that has 37 avocados and 1/2 1 , where larger constants correspond a. 27 grapefruits. b. 32 grapefruits. c. 17 grapefruits. d. 22 grapefruits. e. 24.5 grapefruits. to higher indifference curves. If good 1 is drawn on the horizontal axis and good 2 on the vertical axis, what is the slope of Ambrose’s indifference curve when his consumption bundle is (9, 5)? a. −0.67 b. −8 c. −9/5 d. −5/9 e. −3 ANS: D DIF: 2 21. If we graph Mary Granola’s indifference curves with avocados on the horizontal axis and grapefruits on the vertical axis, then whenever she has more grapefruits than avocados, the slope of her indifference curve is 22. Whenever she has more avocados than grapefruits, the slope is 21/2. Mary would be indifferent between a bundle with 14 avocados and 20 grapefruits and another bundle that has 26 avocados and a. 11 grapefruits. b. 18 grapefruits. c. 6 grapefruits. d. 16 grapefruits. e. 13.5 grapefruits. ANS: A DIF: 2 22. Recall that Tommy Twit’s mother mea sures the departure of any bundle from her favorite bundle for Tommy by the sum of the absolute values of the differences. Her favorite bundle for Tommy is (2, 7), that is, 2 cookies and 7 glasses of milk. Tommy’s mother’s indifference curve that passes through the point (c, m) = (4, 5) also passes through a. the point (6, 3). b. the points (2, 3), (6, 7), and (4, 9). c. the point (2, 7). ANS: A DIF: 2 18. Nancy Lerner is taking a course from Professor Goodheart who will count only her best midterm grade and from Professor Stern who will count only her worst midterm grade. In one of her classes, Nancy has scores of 30 on her fi rst midterm and 50 on her second midterm. When the fi rst midterm score is mea sured on the horizontal axis and her second midterm score on the vertical, her indifference curve has a slope of zero at the point (30, 50). Therefore this class could a. be Professor Goodheart’s but could not be Professor Stern’s. b. be Professor Stern’s but could not be Professor Goodheart’s. c. not be either Professor Goodheart’s or Professor Stern’s. d. be either Professor Goodheart’s or Professor Stern’s. d. the points (4, 7), (2, 5), and (2, 9). e. None of the above. ANS: A DIF: 2 19. Nancy Lerner is taking a course from Professor Goodheart who will count only her best midterm grade and from Professor Stern who will count only her worst midterm grade. In one of her classes, Nancy has scores of 20 on her fi rst midterm and 70 on her second midterm. When the fi rst midterm score is mea sured on the horizontal axis and her second midterm score on the vertical, her indifference curve has a slope of zero at the point (20, 70). Therefore this class could a. be Professor Goodheart’s but could not be Professor Stern’s. b. not be either Professor Goodheart’s or Professor Stern’s. c. be either Professor Goodheart’s or Professor Stern’s. e. None of the above. ANS: B DIF: 2 23. Recall that Tommy Twit’s mother mea sures the departure of any bundle from her favorite bundle for Tommy by the sum of the absolute values of the differences. Her favorite bundle for Tommy is (2, 7), that is, 2 cookies and 7 glasses of milk. Tommy’s mother’s indifference curve that passes through the point (c, m) = (5, 4) also passes through a. the points (5, 7), (2, 4), and (2, 10). b. the points (2, 1), (8, 7), and (5, 10). c. the point (8, 1). d. be Professor Stern’s but could not be Professor Goodheart’s. e. None of the above. ANS: A DIF: 2 d. the point (2, 7). 20. If we graph Mary Granola’s indifference curves with avocados on the horizontal axis and grapefruits on the vertical axis, then whenever she has more grapefruits e. None of the above. ANS: B DIF: 2 Preferences | 15 a. are transitive. b. are complete. c. are convex. d. obey the Law of Demand. e. None of the above. ANS: E DIF: 2 PROBLEMS 24. Scholastica is taking a class from Professor Chaos. Professor Chaos gives two tests in this course and determines a student’s grade as follows. He determines the smaller of the following two numbers: half of the score on the fi rst test (which is a relatively easy test) and the total score on the second test. He gives each student a numerical score equal to the smaller number and then ranks the students. Scholastica would like to be ranked as high as possible in Professor Chaos’s rankings. If we represent her score on the fi rst exam on the horizontal axis and her score on the second exam on the vertical axis, then her indifference curves a. are L-shaped with kinks where the two exam scores are equal. b. have sections with a slope 22 and sections with a slope 1/2. c. are positively sloped. 1. Draw graphs with quantities of pepperoni pizza on the horizontal axis and quantities of anchovy pizza on the vertical axis to illustrate the following situations. In each case draw two different indifference curves and make a little arrow pointing in the direction of greater preference. a. Marvin loves pepperoni pizza and hates anchovy pizza. b. Mavis hates anchovy pizza and is completely indifferent about pepperoni pizza. d. are L-shaped with kinks where the exam 1 score is twice the exam 2 score. e. are straight lines with a slope of 21/2. ANS: D DIF: 2 ANS: a. Indifference curves slope up and to the right. Arrow points down and to the left. b. Indifference curves are horizontal lines. Arrow points down. DIF: 3 25. In Professor Meanscore’s class, the fi rst midterm exam and the second midterm exam are weighted equally toward the fi nal grade. With the fi rst midterm’s score on the horizontal axis, and the second midterm’s score on the vertical axis, indifference curves between the two exam scores are a. L-shaped with lines extending upward and to the right. b. L-shaped with lines extending downward and to the left. c. parabola shaped. 2. Coach Ste roid likes his players to be big, fast, and obedient. If player A is better than player B in two of these three characteristics, Ste roid will prefer A to B. Three players try out for quarterback. Wilbur Westing house weighs 320 pounds, runs very slowly, and is quite obedient. Harold Hotpoint weighs 240 pounds, runs extremely fast, and is extremely disobedient. Jerry Jacuzzi weighs 150 pounds, runs at average speed, and is extremely obedient. Does Coach Ste roid have transitive preferences? Explain your answer. d. straight lines with slope 21. ANS: No. Ste roid prefers W to H because W is heavier and more obedient. He prefers H to J because H is heavier and faster. But he prefers J to W because J is more obedient and faster than W. Since his preferences have a cycle, they cannot be transitive. DIF: 3 e. straight lines with slope 2. ANS: D DIF: 2 26. Professor Stern’s colleague, Dr. Schmertz, gives one midterm exam and a fi nal exam. He weights the fi nal twice as heavily as the midterm to determine the course grade. No grades can be dropped. If the midterm score is represented on the horizontal axis and the fi nal score on the vertical axis, and if a student in Dr. Schmertz’s class cares only about her course grade, her indifference curve is a. a line with slope 22. b. a line with slope 21. c. a line with slope 20.5. 3. Belinda loves chocolate and always thinks that more is better than less. Belinda thinks that a few piano lessons would be worse than none at all, but if she had enough piano lessons to get good at playing the piano, she would prefer more lessons to less. Draw a graph with piano lessons on the horizontal axis and chocolate on the vertical axis. On your graph sketch two d. L-shaped with the kink at (x, 2x). e. L-shaped with the kink at (2x, x). ANS: C DIF: 2 27. I prefer 6 apples and 1 orange to 5 apples and 2 oranges.
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