# Elasticity of Demand

If the price elasticity of demand is –1.5 and a change in the price of the product increases the quantity demanded by 4%, then what is the percent change in price?

A)

–0.375%.

B)

–6.000%.

C)

–2.667%.

Explanation

Price elasticity of demand is calculated by dividing the percent change in quantity demanded by the percent change in price. The percent change in price is, therefore, the percent change in quantity demanded divided by the price elasticity of demand = 4 / –1.5 = –2.667.

If Elasticity = (%ChangeQuantity/%ChangePrice) why is this problem not solved by -1..5 = 4%/X so X = -1.5 * 4% = -6%. Why do they start with -1.5 = 4%/X then…-1.5X=4%….X=4%/-1.5 = -2.6667%?

Am I forgetting basic algebra?

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wichertj wrote:
If the price elasticity of demand is –1.5 and a change in the price of the product increases the quantity demanded by 4%, then what is the percent change in price?

A)

–0.375%.

B)

–6.000%.

C)

–2.667%.

Explanation

Price elasticity of demand is calculated by dividing the percent change in quantity demanded by the percent change in price. The percent change in price is, therefore, the percent change in quantity demanded divided by the price elasticity of demand = 4 / –1.5 = –2.667.

If Elasticity = (%ChangeQuantity/%ChangePrice) why is this problem not solved by -1..5 = 4%/X so X = -1.5 * 4% = -6%. Why do they start with -1.5 = 4%/X then…-1.5X=4%….X=4%/-1.5 = -2.6667%?

Am I forgetting basic algebra?

Probably.

Elasticity = %ΔQ / %ΔP

Elasticity × %ΔP = %ΔQ

%ΔP = %ΔQ / Elasticity

Simplify the complicated side; don't complify the simplicated side.

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Thanks! It clicked haha

My pleasure.

Simplify the complicated side; don't complify the simplicated side.

Financial Exam Help 123: The place to get help for the CFA® exams
http://financialexamhelp123.com/