Course 2- Actex practice exam 1, #12

[retaker]

Part of the question asks:

Elastic demand implies that stock prices will not change when a large sale of shares occurs.

Using my micro knowledge, I assumed that for finance elacities are defined the same way, and hence if demand is elastic then the curve is flat, so a large change in quantity will not change price much?

They say the above statement is false. Is this just a matter of wording? Will not change vs. will not change much?

[theplaymaker]

This assumes

(1) no asymmetic information exists concerning the stock
(2) stocks should be nearly perfect substitutes for each other

The answer is true because highly elastic demand for stocks entails that a large discount is not needed to sell a large block of stock. If the price of a large block of stock were lowered, then theoretically due to the high elastic demand, EVERYBODY would scramble to buy that stock at the lower price.

This question is testing your understanding of what constitutes an efficient market.

Hope I didn't ramble too much!! :)

The Playmaker #88

[retaker]

Thanks Playmaker.

I think I understand what you are saying. In fact, isn't it the same as what I thought above? Highly elastic ---> small change price --> large change quantity. So it should work the other way around too, right?

Large change quantity --> small change price.

[retaker]

I'm sorry, I may have missed your conclusion. Did you say that you thought the following is true?

"Elastic demand implies that stock prices will not change when a large sale of shares occurs. "