VEE MICROECONOMICS EXAM 2026/2027
QUESTIONS WITH VERIFIED SOLUTIONS
Instructions: This exam contains multiple-choice questions covering the core
content tested on the VEE Microeconomics final exam. Topics include elasticity,
consumer choice, production and costs, market structures, and welfare
economics.
1. Assume a consumer's monthly demand for pre-lit artificial Christmas
trees is given by: Q = 2 - 0.3Pa + 0.0004I + 0.12Pr. Price of artificial trees
= $40, income = $3,000, price of real trees = $80. The income elasticity
of demand is closest to:
A. 1.2
B. 1.3
C. 1.5
Correct Answer: C — 1.5
Rationale: Income elasticity = (dQ/dI) × (I/Q). dQ/dI = 0.0004. Q = 2 -
(0.3×40) + (0.0004×3000) + (0.12×80) = 0.8. E = 0.0004 × (3000/0.8) =
1.5. Since positive, it is a normal good .
,2. A 10% increase in the price of a good causes 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
Correct Answer: B — Unit elastic
Rationale: E = dQ/dP = -10%/10% = 1. Greater than 1 is elastic and less
than 1 is inelastic .
3. 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
Correct Answer: B — The substitution effect only
,Rationale: Negative income elasticity applies to inferior goods. For
inferior goods, higher income drives demand down, so the increase in
demand from a price reduction is attributable to the substitution effect
.
4. 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
Correct Answer: A — If the price elasticity of demand is negative, then
the demand curve slopes downward
Rationale: 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,
negative cross-price elasticity indicates complements, not substitutes .
5. If a good's own-price elasticity has a magnitude of less than 1.0, a
reduction in its price will:
A. Increase total expenditures
B. Reduce total expenditures
C. Have no effect on total expenditures
Correct Answer: B — Reduce total expenditures
Rationale: If demand is inelastic (less than 1), a decrease in price
reduces total expenditures because the percentage increase in quantity
demanded is smaller than the percentage decrease in price .
6. For a negatively sloped linear demand curve, own-price elasticity is
most likely:
QUESTIONS WITH VERIFIED SOLUTIONS
Instructions: This exam contains multiple-choice questions covering the core
content tested on the VEE Microeconomics final exam. Topics include elasticity,
consumer choice, production and costs, market structures, and welfare
economics.
1. Assume a consumer's monthly demand for pre-lit artificial Christmas
trees is given by: Q = 2 - 0.3Pa + 0.0004I + 0.12Pr. Price of artificial trees
= $40, income = $3,000, price of real trees = $80. The income elasticity
of demand is closest to:
A. 1.2
B. 1.3
C. 1.5
Correct Answer: C — 1.5
Rationale: Income elasticity = (dQ/dI) × (I/Q). dQ/dI = 0.0004. Q = 2 -
(0.3×40) + (0.0004×3000) + (0.12×80) = 0.8. E = 0.0004 × (3000/0.8) =
1.5. Since positive, it is a normal good .
,2. A 10% increase in the price of a good causes 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
Correct Answer: B — Unit elastic
Rationale: E = dQ/dP = -10%/10% = 1. Greater than 1 is elastic and less
than 1 is inelastic .
3. 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
Correct Answer: B — The substitution effect only
,Rationale: Negative income elasticity applies to inferior goods. For
inferior goods, higher income drives demand down, so the increase in
demand from a price reduction is attributable to the substitution effect
.
4. 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
Correct Answer: A — If the price elasticity of demand is negative, then
the demand curve slopes downward
Rationale: 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,
negative cross-price elasticity indicates complements, not substitutes .
5. If a good's own-price elasticity has a magnitude of less than 1.0, a
reduction in its price will:
A. Increase total expenditures
B. Reduce total expenditures
C. Have no effect on total expenditures
Correct Answer: B — Reduce total expenditures
Rationale: If demand is inelastic (less than 1), a decrease in price
reduces total expenditures because the percentage increase in quantity
demanded is smaller than the percentage decrease in price .
6. For a negatively sloped linear demand curve, own-price elasticity is
most likely:
