CA VEE MICROECONOMICS.FINAL TEST 2026\2027.
Assume a consumer's monthly demand for pre-lit artificial Christmas trees is given by this
equation:
Q = 2 - 0.3Pa + 0.0004I + 0.12Pr
Q is the number of pre-lit artificial Christmas trees demanded each month
I is the household monthly income
Pa is the price of pre-lit artificial Christmas trees, and
Pr is the price of real Christmas trees
Further assume that the price of pre-lit artificial Christmas trees is $40, household income is
$3,000, and the price of real Christmas trees is $80.
The income elasticity of demand for pre-lit artificial Christmas trees is closest to:
A. 1.2
B. 1.3
C. 1.5
Answer: C. 1.5
Income elasticity of demand = (dQ/dI) * (I/Q)
dQ/dI = 0.0004
Q = 2 - (0.340) + (0.0004 3000) + (0.12*80) = 0.8
E = 0.0004 (3000/0.8) = 1.5
Since this value is positive, it is a normal good
A 10% increase in the price of a good causes the quantity demanded to fall by 10%. This good's
own-price elasticity is most accurately described as:
A. Elastic
B. Unit elastic
C. Perfectly inelastic
Answer: B. Unit elastic
,CA VEE MICROECONOMICS.FINAL TEST 2026\2027.
E = dQ/dP = -10%/10% = 1
Greater than 1 is elastic and less than 1 is inelastic.
If the income elasticity of demand for a good is negative, an increase in demand after its price is
reduced is most likely attributable to:
A. The income effect only
B. The substitution effect only
C. Both the income effect and the substitution effect
Answer: B. the substitution effect only
Negative income elasticity of demand applies to inferior goods, so a reduction in price will drive
purchasing of other products with the surplus purchasing power. For inferior goods, higher income will
drive demand down.
Which of the following statements is most accurate?
A. If the price elasticity of demand is negative, then the demand curve slopes downward
B. If the income elasticity of demand for a good is positive, then the good is classified as an
inferior good
C. If the cross-price elasticity of demand between two goods is negative, then the two goods are
classified as substitutes
Answer: A. If the price elasticity of demand is negative, then the demand curve slopes downward
A downward sloping demand curve indicates an inverse relationship between quantity and price, showing
negative price elasticity.
For B, positive income elasticity is a normal good.
For C, cross-price elasticity is the percentage change in demand of one good over the other good.
Negative means good X is in higher demand when the price of Y decreases and vice versa. The decrease
in the price of Y increases the quantity demanded for Y, so the goods are complements and not
substitutes.
Which of the following statements is most accurate? If a good's own-price elasticity has a
magnitude of:
A. less than 1.0, price and total expenditures are negatively related.
, CA VEE MICROECONOMICS.FINAL TEST 2026\2027.
B. less than 1.0, a reduction in its price will reduce total expenditures.
C. greater than 1.0, price and total expenditures are positively related.
Answer: B. less than 1.0, a reduction in its price will reduce total expenditures.
E = dQ/dP
If demand is elastic (greater than 1), they are negatively related so a 5% increase in price will reduce
quantity by more than 5%. If demand is inelastic (less than 1) increase in price reduces demand by less
than that amount, increasing total expenditure (cost * amount)
For a negatively sloped linear demand curve, own-price elasticity is most likely:
A. highest at relatively high prices.
B. the same at all points along the curve.
C. highest at relatively high levels of quantity demanded.
Answer: A. highest at relatively high prices
E = dQ/dP
Elasticity is higher when demand is lower or price is higher. A small change in price has a greater impact
on demand when the starting point is higher.
All else equal, if the price of a normal good decreases, it is most likely that:
A. the quantity demanded will increase due to both the substitution effect and the income effect.
B. the increase in the quantity demanded attributable to the substitution effect will more than
offset the decrease in the quantity demanded attributable to the income effect.
C. the increase in the quantity demanded attributable to the income effect will more than offset
the decrease in the quantity demanded attributable to the substitution effect.
Answer: A. the quantity demanded will increase due to both the substitution effect and the income effect
Normal goods are subject to both the substitution and income effects, and both will lead to an increase in
the quantity purchased.
Substitution: as price decreases, consumers will purchase more of itIncome: decrease in prices
increases purchasing power, so individuals can purchase more of the good
The shape of the demand curve for a good that is sold in a perfectly competitive market is most
likely:
Assume a consumer's monthly demand for pre-lit artificial Christmas trees is given by this
equation:
Q = 2 - 0.3Pa + 0.0004I + 0.12Pr
Q is the number of pre-lit artificial Christmas trees demanded each month
I is the household monthly income
Pa is the price of pre-lit artificial Christmas trees, and
Pr is the price of real Christmas trees
Further assume that the price of pre-lit artificial Christmas trees is $40, household income is
$3,000, and the price of real Christmas trees is $80.
The income elasticity of demand for pre-lit artificial Christmas trees is closest to:
A. 1.2
B. 1.3
C. 1.5
Answer: C. 1.5
Income elasticity of demand = (dQ/dI) * (I/Q)
dQ/dI = 0.0004
Q = 2 - (0.340) + (0.0004 3000) + (0.12*80) = 0.8
E = 0.0004 (3000/0.8) = 1.5
Since this value is positive, it is a normal good
A 10% increase in the price of a good causes the quantity demanded to fall by 10%. This good's
own-price elasticity is most accurately described as:
A. Elastic
B. Unit elastic
C. Perfectly inelastic
Answer: B. Unit elastic
,CA VEE MICROECONOMICS.FINAL TEST 2026\2027.
E = dQ/dP = -10%/10% = 1
Greater than 1 is elastic and less than 1 is inelastic.
If the income elasticity of demand for a good is negative, an increase in demand after its price is
reduced is most likely attributable to:
A. The income effect only
B. The substitution effect only
C. Both the income effect and the substitution effect
Answer: B. the substitution effect only
Negative income elasticity of demand applies to inferior goods, so a reduction in price will drive
purchasing of other products with the surplus purchasing power. For inferior goods, higher income will
drive demand down.
Which of the following statements is most accurate?
A. If the price elasticity of demand is negative, then the demand curve slopes downward
B. If the income elasticity of demand for a good is positive, then the good is classified as an
inferior good
C. If the cross-price elasticity of demand between two goods is negative, then the two goods are
classified as substitutes
Answer: A. If the price elasticity of demand is negative, then the demand curve slopes downward
A downward sloping demand curve indicates an inverse relationship between quantity and price, showing
negative price elasticity.
For B, positive income elasticity is a normal good.
For C, cross-price elasticity is the percentage change in demand of one good over the other good.
Negative means good X is in higher demand when the price of Y decreases and vice versa. The decrease
in the price of Y increases the quantity demanded for Y, so the goods are complements and not
substitutes.
Which of the following statements is most accurate? If a good's own-price elasticity has a
magnitude of:
A. less than 1.0, price and total expenditures are negatively related.
, CA VEE MICROECONOMICS.FINAL TEST 2026\2027.
B. less than 1.0, a reduction in its price will reduce total expenditures.
C. greater than 1.0, price and total expenditures are positively related.
Answer: B. less than 1.0, a reduction in its price will reduce total expenditures.
E = dQ/dP
If demand is elastic (greater than 1), they are negatively related so a 5% increase in price will reduce
quantity by more than 5%. If demand is inelastic (less than 1) increase in price reduces demand by less
than that amount, increasing total expenditure (cost * amount)
For a negatively sloped linear demand curve, own-price elasticity is most likely:
A. highest at relatively high prices.
B. the same at all points along the curve.
C. highest at relatively high levels of quantity demanded.
Answer: A. highest at relatively high prices
E = dQ/dP
Elasticity is higher when demand is lower or price is higher. A small change in price has a greater impact
on demand when the starting point is higher.
All else equal, if the price of a normal good decreases, it is most likely that:
A. the quantity demanded will increase due to both the substitution effect and the income effect.
B. the increase in the quantity demanded attributable to the substitution effect will more than
offset the decrease in the quantity demanded attributable to the income effect.
C. the increase in the quantity demanded attributable to the income effect will more than offset
the decrease in the quantity demanded attributable to the substitution effect.
Answer: A. the quantity demanded will increase due to both the substitution effect and the income effect
Normal goods are subject to both the substitution and income effects, and both will lead to an increase in
the quantity purchased.
Substitution: as price decreases, consumers will purchase more of itIncome: decrease in prices
increases purchasing power, so individuals can purchase more of the good
The shape of the demand curve for a good that is sold in a perfectly competitive market is most
likely:
