5. Assume that Insite Corporation produces advanced analytic software for computer

simulations called Model-It. Based on an analysis of product sales over a two-year period,

Insite's marketing department estimates the demand for Model-It to be QM = 1,200 - 8PM +

4PS, where QM denotes units sold of Model-It software, PM denotes Model-It's price, and PS

denotes the price of a best-selling statistical software package (with both prices in dollars).

(a) Currently, PM = $200 and PS = $300. What is the predicted demand for Model-It

software?

(b) The price PS has been unchanged (at $300) during the last 6 months. Given this

information, derive the equation for Model-It's demand curve (with QM as the left-side

variable). Also determine its inverse demand curve (with PM as the left-side variable).

(c) An industry analyst comments that demand for Model-It is not very sensitive to changes

in the price of the statistical software package PS. (This package does perform some of the

same operations as Model-It, but not as quickly or conveniently.) Carefully assess this

contention. Is his contention correct?

(d) Suppose the marginal cost of producing Model-It is negligible. However, the company

incurred significant costs in developing the product for market (estimated to be about

$350,000). Using Model-It's estimated demand curve, determine the optimal price and output

for Model-It.