CFA Practice Question

There are 539 practice questions for this study session.

CFA Practice Question

The quantity demanded of a product goes from 100 to 110 units when the price goes from $50 to $25. What is the price elasticity?
A. -0.40
B. -0.25
C. -0.20
Explanation: (100-110)/(110+100) / (50-25)/(50+25) = -0.14. Price elasticity equals the percentage change in quantity over the percentage change in price. These calculations are based on the arc elasticity formula. Using percentages calculated as ((100-110)/100)/(50-25)/50), the elasticity would be -.20 (-10%/50%). (The CFA exam questions have often used this latter approach).

User Contributed Comments 8

User Comment
prachirp The latter one is more arithematically correct and logical to follow ,as per the formula.I am going for this one.
DiscoAfro Schweser Notes says exactly the opposite; CFA uses the arc elasticity formula. You should use this one. So what is the case here?
jpducros learn both...
JCopeland The point elasticity estimate is best used for small changes in price. It specifies elasticity at a specific point along the curve. The arc elasticty formula (the first one) is much more accurate for a large change in price (-50%?) and measures the elasticity along the length of the arc. Point= small change/ Arc= large change.
TiredHand What? I don't get it. Why are there two - it should be one. This makes me extremely unhappy when easy topics are confused
tushi123 d cfa textbook goes by d arc elasticity formula, but dis is a nice reminder to check both d formulas
thekobe for the exam use the first formula
thekobe with the first one no anwser matches, so apply the second one and thats it
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