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**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.

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**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 |