[some_tear]

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

Answer:B

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

[RobOh]

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.

[RobOh]

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

[some_tear]

Sorry, I'm even more confused, especially about your formula for:

(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?

[RobOh]

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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