Explanation The demand function for a linear demand curve is in the following form: Q d = A − BP (1) To derive the demand function, the slope of the curve or value of –B has to be calculated using the elasticity formula. E d = − B × ( P Q ) (2) Substitute the values in Equation (2). E d = − B × ( P Q ) − 0.5 = − B ( 2 1 , 000 , 000 ) − B = − 0.5 0.000002 = − 250 , 000 The slope or value of B is -250,000. Substitute the value of B or slope (ignore the sing) inthe demand in Equation (1) to calculate the value of A. Q d = A − BP 1,000,000 = A − ( 250 , 000 × 2 ) 1,000,000 = A − ( 500 , 000 ) A = 500 , 000 + 1,000,000 A = 1,500,000 The value of A is 15, 00,000

Demand function and price level.

MICROECONOMICS CONNECT ACCESS

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ISBN: 9780077491703

Author: BERNHEIM

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Chapter 2, Problem 11P

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Demand function and price level.

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Suppose a movie theater raises the price of popcorn 10 percent, but customers do not buy any less popcorn. What does this tell you about the price elasticity of demand? What will happen to total revenue as a result of the price increase?
(Calculating Price Elasticity of Demand) Suppose that 50 units of a good are demanded at a price of Si per unit. A reduction in price to $0.20 results in an increase in quantity demanded to 70 units. Using the midpoint formula, show that these data yield a price elasticity of 0.25. By what percentage would a 10 percent rise in the price reduce the quantity demanded, assuming price elasticity remains constant along the demand curve?
Suppose a straight-line downward-sloping demand curve shifts rightward. Is the price elasticity of demand higher, lower, or the same between any two prices on the new (higher) demand curve than on the old (lower) demand curve?
Prove that price elasticity of demand is not the same as the slope of a demand curve.
Using the following equation for the demand for a good or service, calculate the price elasticity of demand (using the point form), cross-price elasticity with good x and income elasticity. Q=82P+0.10I+Px Q is quantity demanded, P is the product price. P1 is the price of a related good, and I is income. Assume that P= $10, I = 100, and Px = 20.
Estimates presented in Exhibit 5 show that Android users have a higher price elasticity of demand for apps in the Google Play Store than do iPhone users in the Apple App Store. Why might Android users tend to be more sensitive to app prices than iPhone users? What categories or types of apps (for example, games/social media) do you think have the highest price elasticities?

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