CFA Practice Question

There are 539 practice questions for this study session.

CFA Practice Question

Suppose that the initial price of pizza is $2 and the initial quantity demanded is 100 pizzas. If the price increases to $2.20 and the quantity demanded falls to 90, what is the price elasticity of demand (in absolute value)?

A. 10
B. 1
C. 1.10
Correct Answer: C

Based on the formula: [(100 - 90)/((100 + 90)/2)] / [(2 - 2.2)/((2 + 2.2)/2)] = 1.1.

User Contributed Comments 8

User Comment
ridone be careful! check which is quantity and which is price.
TUFF here you don't have to round-up the answer to neither significant figures nor decimal places. the word is absolute. that is actual.
Korny Why the answer is not 1.0? Can anyone please explain?
leftcoast Korny - because the slope of the demand curve is unknown, we can't calculate the elasticity of a specific point. Therefore we calculate the "arc elasticity," which is the elasticity between two price points. Answer above is just plugging the numbers into the formula: [(Change in quantity)/(average quantity)]/[(change in price)/(average price)]
plablonde1 how would it be clear in a question like this as to what the slope of the demand curve is? i'm struggling to understand when i would be calculating arc elasticity vs elasticity of a specific point
kingirm ????? why sum up and divide into 2 the beginning and ending figures ???
IatLs Thanks for the explanation leftcoast.
Andmlk The slop is actually negative if quantity decreases when prices rises. So I really do not understand why we calculate this Arc with mid points.
You need to log in first to add your comment.