- CFA Exams
- CFA Level I Exam
- Study Session 4. Economics (1)
- Reading 12. Topics in Demand and Supply Analysis
- Subject 2. Elasticities of Demand
CFA Practice Question
Paul spends $100 per month on books whether their price rises or falls. His price elasticity of demand for books is (in absolute value) ______.
A. 0
B. 1
C. infinity
Explanation: His spending does not change with price. That means that if price rises, he buys fewer books, but still spends $100; if price falls, he buys more books, but still spends $100. A 1% change in price leads to a 1% change in quantity demanded, the definition of unitary elasticity.
User Contributed Comments 11
| User | Comment |
|---|---|
| dimanyc | That's a simple, but tricky kinda question I'd expect on CFA. I chose A :) |
| whoi | me too.....no thought about paul spending money on other books. kind'a stupid. |
| Xocrevilo | We need to assume that all books are the same price, so that a % change in price leads to the same % change in units purchased. This maybe far from reality! But such is the Economic world: far removed from the real world. |
| Shalva | This is one of the best questions I've seen here |
| copus | very good question.....i got snaked and answered A! |
| cong | unitary elasticity = total revenue doesn't change as price changes |
| Thecatz | very very good question. got me too... i chose A |
| Saxonomy | Ahhhhh, so if he bought 5 books, whether prices went up or down, then his price e.o. demand would be 0. |
| dipu617 | I chose A. This is a good question. It made my conception on elasticity clearer. Thanks. :-) |
| El89 | chose A too. sneaky :p |
| Ladygaga | The word approximately is missing here. So if each book original price is 20 dollars, now changed to 25 dollars, the %age change in price is 25%, and the no of books you can buy changes from 5 to 4, which is 20% decrease.So 20%/25% is not 1.. |