If the price elasticity of demand is 1.5 and a change in the price of the product increases the quantity demanded by 4 percent, then what is the percent change in price? A) –0.375%. B) +0.375%. C) +2.667%. D) -2.667%. Your answer: C was incorrect. The correct answer was D) -2.667%.
never mind…I saw my mistake after posting it. I assumed that the good was a luxury good.
mate!! i hope you know the difference between price elasticity and income elasticity !!!
Of course it is possible to assume that it’s a luxury good. --> Your answer would be right then. I mean if we don’t see the sign of the price elasticity in the question then your answer should be ok. So it’s a bad test question…
Right but I am sure they would state it if it was about luxury goods
guys a good is a luxury good if the income elasticity of that good is greater than 1. not the price elasticity! the above question talks about the price elasticity. so i don’t know why there’s even a mention of ‘luxury good’.
Dear manavsachdeva, there are some relationships between income and price elasticity of demand: If a good has a positive positive price elasticity then it also has to have a negative income elasticity. (I don’t know if you can read this in the CFA-books, but you can learn that in every microeconomic beginners course…) With luxury good I ment a good with a negative income elasticity. Example: If I have more income then my demand for Ferraris will decrease cause I substitute it by Helicopters. (negative inc.el) But if the price of a ferrari rises then i will buy more Ferraris. --> It’s getting cooler to drive the expensive ferraris. (pos. price el.) That’s what I ment by luxury good, where I come from we call it (“Giffen good”). The test question is in my opinion not a professional one.
manavsachdeva is right i got fooled by the fact that the thread name states something that has nothing to do with the actual multiple choice price elasticity will always be negative and income elasticity differs on the type of good
Never heard about positive demand price elasticity? I mean it is true: In most cases on this world price elasticity is negative but there are (as mentioned) some exceptions… @ florinpop “price elasticity will always be negative” That’s not right.Here a small example from reality. Think about absolute primitive basic toilet paper. Consider a very poor person who buys a special quantity (=8 rolls) of that paper each month (example: 1 per roll, 8 in total makes 8 per month) He can’t afford to buy better quality (1,5 ) because he's poor. His toilet paper budget is 8 per month. If the bad toilet paper price decreases dramatically (for example new price: 0,5 ) the person will substitute the bad quality paper by the better paper (1,5 ). Now the person can afford for it’s 8 $ - budget: 4 good and 4 bad paper rolls (total is still 8 rolls). So the person is satisfied with it’s 8 rolls and a higher mean of quality. But note: the price of the bad paper decreased and the demand of the bad paper decreased to. As we can see in the example: dx/dp*p/x>0