CFA Practice Question

There are 539 practice questions for this study session.

CFA Practice Question

Suppose the price of paper rises 10% and the quantity demanded falls 15%.

A. Is the price elasticity of demand for paper elastic, unit elastic, or inelastic?
B. Will revenue rise, decline, or stay the same with the given change in price?
Correct Answer: elastic; decline

Price elasticity of demand is 15%/10% = 1.5. Since 1.5 > 1, demand is elastic.
Total revenue will fall. This is because the percentage decrease in the quantity demanded (15%) exceeds the percentage increase in the price (10%).

User Contributed Comments 6

User Comment
steved333 But would that effect be immediate, or a long-run effect?
jamestavs it depends on it being regular paper or toilet paper
mrushdi good answer
pepper don't need to do the maths. Why? Price Increase = Qty demand decrease = Elastic

And if it is elastic, this mean increase price = greater decrease in qty demand = lower revenue.
sgossett86 My teacher pushed on us that when price elasticity is greater than one the demand is elastic. when less than one, inelastic. elastic demand means that an increase in price causes a decrease in total revenues. for inelastic demand an increase in price causes an increase in total revenues. always remember that.
melmay11 Thanks for sharing sgossett86
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