CFA Practice Question

CFA Practice Question

Suppose the demand for widgets has an elasticity of 1. A new manufacturer of widgets enters the market, which causes price to fall and the quantity of widgets sold to increase by 1%. We would expect the market price of widgets to approximately change by:
A. 0%
B. -1%
C. 1%
Explanation: Elasticity of 1 means % change in price equals negative of % change in quantity.

User Contributed Comments 3

User Comment
andrewmorgan surely this is wrong. a positive elasticity means that as q increases, p in creases
cwest020 andrew, you are incorrect. Let me know when you find a product that when price increases Quantity demanded increases. Think of the negative sign as the relationship between the variables in the elasticity question. So cross elasticity of a substitute will be positive, when price increase of product A, QD of substitute product b should increase. The main key is know 1=unit elastic, less than 1 is inelastic and greater than 1 is elastic.
GBolt93 Might want to get off your high horse and review veblen and giffen goods. However it's pretty common for elasticity to be stated as an absolute value, and the problem does specify that the price falls in this case.
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