CFA Practice Question

There are 539 practice questions for this study session.

CFA Practice Question

A recent increase in the supply of oranges caused their price to drop from $5 to $2.50 per bushel and quantity demanded to rise from 10,000 bushels to 20,000 bushels. This indicates that the price elasticity of demand for oranges in this price range is ______.
A. -2
B. -0.5
C. -1
Explanation: Price elasticity is found by solving the following equation:

Percent change in quantity demanded/Percent change in price: [(10,000-20,000)/(20,000+10,000)] / [(5-2.50)/(5+2.5)] = -1

User Contributed Comments 16

User Comment
tjinmei quite good question you've got there. boo
mtcfa Is it just me or does this website calculate %change differently than I've been taught. When quantity moves from 10k to 20k, is that not a 100% change???
shayu mtcfa: check the formula for the calculation of price elasticity of demand. The answer given is correct.
dimanyc i thought it's supposed to be averages in the denominator of each?!
tabulator 2s cancel out. This is just a faster way to get the same result.
viannie again I remind myself, don't eyeball, just do the math and definitely we'll get the right answer.
emongeca7 dimanyc, if you use the averages in the denominators, you get the given answer. What you say is correct, but does not invalidate the answer.
toto123 %change is quatity is 100%
%change in price is 50%
100/50 =2
how in the hell did they arrive at this answer?
thekobe if you use the averages in the denominators you get: change in Q 10/15 change in P 2.5/3.75 so you get .67/.67
dash1s (Change in Q/Qo)/(Change in P/Po)

(10,000/10,000)/(2.50/2.50)
gill15 Isn't the price elasticity really 1 and not -1? I thought elasticity was unit free and the Absolute value.
gill15 Read note above.....I just went through the notes..."Many economists present the price elasticity as an absolute value so that it has a positive value. We will follow this convention"

It should be 1
gill15 Also, Dash...dont use that form. Po os 5 in the question and therefor you would end up with 2 as an answer. Use the averages method.
alles i didn't use the averages because the question asked for the elasticity "in this price range"
Lambo83 When there is only two quantity and two price points use the Arc Elasticity. Page 45 Reading 13. The denominators for both the change in Q and P are averages
MaxGuL Example from CFA member area
The price of a good falls from $15 to $13. Given this decline in price, the quantity demanded of the good rises from 100 units to 120 units.
The own-price elasticity of demand = ((120-100)/100) / ((13-15)/15) = - 1.5

Correct answer = ((20-10)/10) / ((2.5-5)/5) = - 2
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