- CFA Exams
- CFA Level I Exam
- Topic 2. Economics
- Learning Module 8. Topics in Demand and Supply Analysis
- Subject 2. Elasticities of Demand

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**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)?

B. 1

C. 1.10

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.

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**User Contributed Comments**
9

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 slope is actually negative if quantity decreases when prices rises. So I really do not understand why we calculate this Arc with mid points. |

ctschro |
ty leftcoast |