Answer: D
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Trade‐offs and Budget Constraints
8) A budget constraint represents the ________.
A) total money income that an agent earns in different time periods
B) goods and services an economic agent can choose given her limited income
C) inequality in the incomes earned by various economic agents
D) aggregate income earned by all firms in an economy
Answer: B
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Trade‐offs and Budget Constraints
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9) Which of the following statements is true?
A) A budget constraint remains the same for a consumer at all levels of income.
B) A budget constraint quantifies the trade‐offs that economic agents face while making decisions.
C) A budget constraint is a function of the income of the consumer and not of the prices of the goods and
services available for consumption.
D) A budget constraint is based on the minimum amount of money that an economic agent can spend on
goods and services.
Answer: B
Difficulty: Easy
AACSB: Analytical Thinking
Topic: Trade‐offs and Budget Constraints
10) A consumer has $20 that he wants to spend on two goods: pens priced at $2 each and pencils priced at
$1 each. Which of the following correctly represents his budget constraint?
A) $20 = ($2/Quantity of pens) + ($1/Quantity of pencils)
B) $20 = ($2 × Quantity of pens) + ($1 × Quantity of pencils)
C) $20 = ($3/Quantity of pens + Quantity of pencils)
D) $20 = $3 × (Quantity of pens ‐ Quantity of pencils)
Answer: B
Difficulty: Medium
AACSB: Application of Knowledge
Topic: Trade‐offs and Budget Constraints
11) An individual has 8 hours to spare. She has to divide her time between two activities: reading and
writing. Which of the following allocations will completely exhaust the individualʹs budget?
A) 3 hours of reading and 4 hours of writing
B) 4 hours of reading and 6 hours of writing
C) 2 hours of reading and 2 hours of writing
D) 5 hours of reading and 3 hours of writing
Answer: D
Difficulty: Easy
AACSB: Application of Knowledge
Topic: Trade‐offs and Budget Constraints
12) A consumer has $50 to spend. He has to decide between buying two goods: magazines priced at $5
each and DVDs priced at $10 each. Which of the following combinations of the two goods will entirely
exhaust his budget constraint?
A) 3 magazines and 4 DVDs
B) 2 magazines and 4 DVDs
C) 6 magazines and 1 DVD
D) 2 magazines and 2 DVDs
Answer: B
Difficulty: Medium
AACSB: Application of Knowledge
Topic: Trade‐offs and Budget Constraints
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13) Which of the following statements is true?