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IAI Actuarial Core Principles · Business Economics · How competitive markets operate

Linear demand for a mutual fund's online investing app subscriptions is Qd = 12,000 - 40P, where P is the monthly fee in rupees. At a fee of Rs 100, what is the point price elasticity of demand (absolute value)?

The elasticity is 0.50. At a fee of Rs 100 quantity demanded is 8,000, and the slope is 40, so elasticity equals 40 times 100 divided by 8,000, which is 0.5. Demand is therefore inelastic at that price.

  1. A0.33Correct
  2. B0.50
  3. C0.80
  4. D1.25
  5. 2.00

Explanation

At P = 100, Q = 12,000 - 4,000 = 8,000. Elasticity = (dQ/dP)(P/Q) = 40 x 100/8,000 = 0.5. Check: 4,000/8,000 = 0.5. So the key is 0.50; the option listing 0.33 would come from using Q=12,000.

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