- CFA Exams
- CFA Level I Exam
- Topic 2. Economics
- Learning Module 8. Topics in Demand and Supply Analysis
- Subject 2. Elasticities of Demand
CFA Practice Question
If the price elasticity of demand is 0.3, then a 20% increase in price will ______ the quantity demanded by ______ %.
B. decrease; 6.0
C. decrease; 1.5
A. increase; 20.3
B. decrease; 6.0
C. decrease; 1.5
Correct Answer: B
The price elasticity of demand is E = %change in quantity/ % change in price. Since demand curves are downward-sloping, this is a negative number. Economists, however, use the absolute value of the % change in quantity.
User Contributed Comments 11
| User | Comment |
|---|---|
| soarer1 | How do you calculate this? |
| yael | Elasticity = % change in quantity/% change in price E = .3 if % change in price = 20% % change in quantity = 20% x .3 % change in quantity = 6% |
| TUFF | if PED=0.3 and %change in qty is 20% or 0.20 therefore there would be a 6% or 0.06 [0.20 *0.3]fall in price. |
| smartinski | Lets say that I sell Bread at $1 and then I raise the price by 50%. Does that mean that demand will decrease by 50%? |
| odette | well, maybe |
| vanillarice | Depends on the elasticity coefficient of bread at that price. |
| wulin | Easiest calculation question in the whole book. |
| supperbee | This is howis reasoned: 1% change in price leads to a .3% change in qty demanded.if price changes by 6% qty demanded changes by? |
| MRSLETS | I used the formula for price elasticiy and Basic mathematics X= Change in gty dd x/0.20=0.30 x=0.30*0.20(cross multiply) x=0.06 x=6% Since price elasticity is less than one,it will be a decrease with 6% |
| bundy | % change in Q / % change in P = .3 so .3 x .20 = .06 X 100 = 6 |
| bidisha | thanks superbee |