- CFA Exams
- CFA Level I Exam
- Study Session 4. Economics (1)
- Reading 12. Topics in Demand and Supply Analysis
- Subject 2. Elasticities of Demand

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**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).

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**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 |