CFA Practice Question

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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.

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..