Hi everyone, I was going through the 2012 morning CFA mock exam for Level 1. Under the Economics section there was a question as follows:
_"Demand for a good is most likely to be more elastic when: A. the good is a necessity. B. a lesser proportion of income is spent on the good. C. the adjustment to a price change takes a longer time. Answer: C _C is correct. The longer the time that has elapsed since a price change, the more elastic demand is. For example, if gas prices rise, consumers cannot quickly change their mode of transportation" If it takes time for consumers to adjust to a price change, wouldn’t that make the demand for the good more inelastic? According to their explanation, the percentage decrease in QD would be greater than the percentage increase in Price of gasoline. I.e. a price rise would cause total expenditure on gasoline to decrease. Wouldn’t the opposite be the case (longer time for adjustments would make the demand for the good inelastic). Is their explanation wrong? If not, can anyone explain where I am thinking wrong. Thanks in advance.
It shd be inelastic according to what they’ve explained. If it takes more time for you to adjust to increasing prices, that means it is inelastic, else you would have switched to another good already. I would have marked B, though I don’t see a string connection between B and elasticity.
S2000Magician, we need you to answer this question…please 
I think that C is a poorly worded answer choice.
The idea they want answer C to convey is that the more time that has elapsed since the price change, the more elastic the price elasticity of demand, because the consumer has time to change their buying habits.
To use an example with which I am quite familiar, suppose that the manufacturer of MREs (MRE = Meal, Ready to Eat, it’s the US Army’s term for field rations) decided to double the price (and that there aren’t contractual restrictions that prevent this, and so on). In the short run, the Army’s demand will change very little: they still have to feed soldiers in the field, and there are very strict requirements on the packaging of MREs (in particular, on the size and shape of the containers, to fit with the soldiers’ equipment), so they need the same amount and it will be hard to find a substitute quickly. In the long run, the Army can find other suppliers who can make MREs to the existing spec, or they can change the spec to fit other manufacturer’s containers, or whatever, so the demand will decrease substantially.
Short run: low price elasticity of demand; long run: high elasticity of demand.
That’s what the author of this question wanted to convey. In my humble opinion, the author did a poor job.
(On the real exam, you won’t see poor attempts such as this; the answer will be clear.)
Answer A and B is wrong, And read the question carefully which is asking for most likely which means ans C is correct.