- CFA Exams
- CFA Level I Exam
- Study Session 4. Economics (1)
- Reading 12. Topics in Demand and Supply Analysis
- Subject 2. Elasticities of Demand

###
**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 |