CFA Practice Question

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CFA Practice Question

You spend 50% of your budget on housing, 30% on food, and 20% on entertainment. Based only on this information, which would you expect to have the most elastic demand?

A. housing
B. food
C. entertainment
Correct Answer: A

The largest share of your budget is spent on housing. Thus, you would be likely to be most responsive to changes in the price of housing.

User Contributed Comments 13

User Comment
cgeek why not entertainment? is that necessity for most people?
danlan Based on the given information, housing is the biggest part of budget, that's why it's most elastic demand. You do not care about the price change if it's only a very small percentage in your salary (see previous example on TV cable).
mikaelian Should short run and long run be considered as housing will be elastic only in the long run?
awellman That is a judgement that is not the same for everyone. Sure housing is the largest part of your budget but its also the second most important item in the list. I guess they are pointing out that 50% is an exaggeration, but so is the 20% for some.
SkinsFan Using housing is a bad example. people will always pay for housing even if they have to drop their food budget to 25% by buying hot dogs instead of beef. Housing Demand is very inelastic.
cmisaac the question read "based only on this information..."
Quite right house confuses this logic and explain why our mind concentrates on entertainment since in the real world this has many substitues
surob Wow, this is tricky one. I thought the answer is entertainment. :(
julescruis I agree with cmisaac, we should not ge confused over theory but depict every word of every question, that will teach us to be mega attentive during the question reading phase
Murrayman Even 'based on this information' is dubious. Considering the percentages, quite a bit of income is spent on entertainment. Ah, whatever. Kiss my arse. Prices of housing way up? Let me go build my own.
byllyd The CFA Institute's study materials show a list of real-world elasticities and housing is in the inelastic deman column at .55. However, there is a sentence that reads, "Other things remaining the same, the greater the proportion of income spent on a good, the more elastic is the demand for it."
bantoo Why we think that price change will be only positive supppose rent falls in a particular area even then you will think to reduce entertainment budget.
schweitzdm Got mixed up on this one too. Need to sharpen this focus people!
alexsar75 poor question. housing is a can't get out of a lease or mortgage very quickly, or move very easily. I can cut an expensive dinner or trip to vegas out anytime. guess they're looking purely at budget, but not a great way to make a point.
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