CFA Practice Question

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CFA Practice Question

If a $100 drop in the price of a $10,000 car resulted in an increase in the quantity of cars purchased from 100 to 110 and a $100 drop in the price of a $1000 vacation rental resulted in an increase in the quantity of weekly vacation homes rented from 100 to 110, the price elasticity of demand is ______.
A. greater for the car
B. less for the car
C. the same for both the car and the vacation rental
Explanation: The percentage rise in quantity was the same for both the car and the vacation rental, but the percentage rise in price was greater for the vacation rental. Its elasticity of demand is smaller than that of the car.

User Contributed Comments 10

User Comment
HYcds I dont think the answer makes sense
Jolen it doesnt make sense as both cases price drops by 100 bucks. however, they are right when they say that the % change in price for vacation rental is more...
aakash1108 PED is greater for the car.....
Poorvi Folks, if in doubt, calculate the elasticities and compare - you will conclude at the same answer. The price elasticity for the car is 10 times that of the vacation in this case.
mishis E of car is [100-110/105] / [100/9,500] = 9.06
E of vacation is [100-110/105] / [100/950] = .907
potocah I dont get it... I think it is lower for the car.... helpppp!!!
riouxcf Potocah, imagine if the car was the same price as the vacation rental. In that case, if you dropped the price by only $10, you would have the same increase in quantity purchased as the vacation rental. If it takes only $10 to spur the same amount of demand as a $100 drop, that product is more elastic.
teje the car makes up a greater percentage of your income, therefore demand is more elastic.
Shaan23 Misha has the right idea but E of car where he has 9500 should be 9950.
shann680 - car drops in value by 1% (100/10,000x100) and quantity increases by 10.
- house drops in value by 10% and quantity increases by 10.

Therefore car is more exposed to PED given a smaller price drop that equates to the same level of PED for the house who's drop is 10x greater
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