CFA Practice Question

CFA Practice Question

The demand curve for a good is given by the following relationship: P = 13 - 2Q. The price elasticity of demand when Q changes from 3 to 4 is ______.
A. -6/7
B. 1
C. -7/6
Explanation: When Q = 3, P = 13 - 2 x 3 = 7; when Q = 4, P = 13 - 2 x 4 = 5.

Price elasticity of demand = {(4 - 3)/[(3 + 4)/2]}/{(5 - 7))/[(5 + 7)/2]} = -6/7. Price elasticity of demand is always negative.

User Contributed Comments 8

User Comment
danlan It's change of quantity/change of price, not the reverse.
dimanyc Don't forget to use averages in both numerator and denominator.
Kuki actually danlan, its %change in qty divided by % change in price
CheeHong Is there a reason to divide both numerator and denominator by 2? Isn't that essentially equals to the same value?
Jolen damn forgot the averages...
kutch when there is negative price elasticity, like in the question above, does it mean that the good in question are substitutes or complements?
achoi0 @kutch: that relates to cross-elasticity, when you calculate the percentage change in quantity for one product due to a percentage change in price of another product
xemex131 if they want to use average then they should mention arc elasiticity
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