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 |