# Why does this simple price elasticity of demand question confuse me? Help.

• This topic has 4 replies, 1 voice, and was last updated 5 months, 2 weeks ago by RobOh.
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• #3071961

Explanation highlighted below makes no sense. How they are going from 20% change in quantity demanded = (x units new – 5000 units old)/5000 units old to 4000 units???? Solving for x gives me 6000. Am I stupid?

The price elasticity of demand for a good is 2.0, and the quantity demanded is 5,000 units. The price increases by 10 percent. What is the new quantity demanded?

a.1,000

b.4,000

c.4,500

d.6,000

Choice “b” is correct. The choice is derived from the following calculations:

Price elasticity of demand = % Change in quantity demanded / % Change in price 2.0 (Given) = 20% (Solve) /10% (Given)% Change in quantity demanded (20%) = X units (new) – 5,000 units (old) 15,000 units (old) = 4,000 units

#3072060 RobOh
Guest

Don’t sweat it, that’s the great part about this forum. Their explanations are sometimes very convoluted. All you need is the below.

20% / 10% = 2

(5000 – 4000) / 5000 = 20%

I hope that makes sense now. Sometimes we know the answer but don’t understand what they are asking. That’s why it’s so important that you keep practicing mcq’s over and over.

#3072099 RobOh
Guest

Sorry, I forgot to add that you should keep in mind that the quantity demanded would decrease if the price increases.

#3074076

(5000 – 4000) / 5000 = 20%. From what I understand, formula for change in quantity is…

(New price – Old price) / Old price

So how did you even derive that formula?

#3074184 RobOh
Guest

Ok, maybe this will make more sense.

Price elasticity of demand = % change in quantity demanded / % change in price

Given information:
Price elasticity of demand = 2.0
% change in demand = ?
% change in price = 10%

X / 10% = 2.0
Therefore, X = 20%

(New quantity – old quantity) / Old quantity = % change in quantity demanded

If you apply the above formula:
(4000 – 5000) / 5000 = 20%

A new quantity of 6000 would also be 20%, however in this problem you would assume that the quantity demanded would decrease if the price increased.

Try drawing it on a supply and demand curve and it may help you visualize it better. Any question that I had on the cpa exam I would always draw the supply and demand curve just to visualize and confirm that I was answering it correctly. Also think about what this is really trying to say, if the price of this good increases 10% then it would mean that the quantity would decrease 20%.

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