Price Elasticity of Demand

CFA Level I
#1

Hi Question on PED please.

QD goes from 80 to 90 when Price falls 1.3 to 1.2. Price elasticity of demand?

a) 1,625

b) 1.47

c) 1.825

I always remembered this as: %change QD/ %change P

i did 90/80 = 12.5%

1.20/1.30 = -8%

12.5/-8 = 1.5625 ???

Answer says to calculate arc elasticity? Q1-Q0/(Q1+Q0) / P1-PO/ (P1+P0)

What is that above formula? I’ve never done percentage changes like that…

thanks

#2

what is the provided answer ?

#3

For whatever reason, when CFA Institute is computing percentage changes for elasticities, they do not divide by the original amount; they divide by the _ average amount _.

Thus, their percentage change in price is:

(P1 – P0) / ((P1 + P0)/2)

= (1.2 – 1.3) / 1.25

=-0.08

and their percentage quantity change is:

(Q1 – Q0) / ((Q1 + Q0)/2)

= (90 – 80) / 85

= 0.1176

Thus, the price elasticity of demand is:

0.1176 / -0.08 = -1.4706