Question
Suppose you have estimated the following direct demand function for a price setting firm: Q = 240-40P a. Find the equation for the inverse demand
Suppose you have estimated the following direct demand function for a price setting firm: Q = 240-40P
a. Find the equation for the inverse demand function
b. Find the equation for the Total Revenue function.
c. Find the equation for the Marginal Revenue function.
d. Find the value of output that maximizes Total Revenue. Find the price that maximizes Total Revenue.
e. Suppose the current price is $4. Calculate the own price elasticity of demand at this price.
f. If the firm were to increase price above $4, what would happen to Total Revenue? Explain your answer using the definition of elasticity, and your knowledge of whether demand is elastic, inelastic or unitary elastic at a price of $4.
g. Draw what is happening in part f using the two graph model used in class (with Demand and MR in the top graph and TR in the bottom graph directly below it). Be sure to label your initial price and quantity, initial TR and then your new price and quantity, and new TR. No numerical values are desired here-it will simply take you longer.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access with AI-Powered Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started