The price of a good falls from $15 to $13. Given this decline in price, the quantity demanded of the good rises from 100 units to 120 units. The price elasticity of demand for the good is closest to: A. 1.3. B. 1.5. C. 10.0.
B. 1.5
thats what i thought…but instead they have used average values of price and quantitites and there answer was 1.3 and its a question from cfa mock…so what should i do if such a question appears in the exams?
Its simple,
(% change is QTD) / (% change in price)
0.2/-0.13 = -1.5
yes but according to cfai its the wrong answer
They have used average values of which prices and wich quantities? According to the information you’ve provided, 1.5 seems to be the correct answer.
there solution is 20/110*14/2=1.3
That’s bizarre. Seriously bizarre.
But . . . if that’s how CFA Institute says to do it, then that’s how you do it; they write the exams.
they gave an example regarding this which i understood but i did not understand what does this have to do with the averaging. They say that suppose your boss increases your pay 10% from €10 to €11. On the same day he reduces your pay by 10% making it equal to €9.9. So this makes you worse off. I understand this but why averaging? Just to make it equal to €10 or is there something else?