- 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**

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.

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**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.. |