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Hello Mr John
In the following question I think there is a mistake in the model answer because of the negative sign of b .It is -.040 .So when inserted in the formula of P=a-bQ the minus sign before b becomes positive and the answer will be P=200+.04Q
Can you please clarify this matter.
Thanks
119
The following price and demand combinations have been given: P1 =$400, Q1 = 5,000 units P2 = $380, Q2 = 5,500 units The variable cost is a constant at $80 per unit and fixed costs are $600,000 per annum. What is the demand function? A P= 200 – 0.04Q B P = 600 – 0.04Q e P =600 + o.04Q D P = 200 – 20QAnswer
119
B
The demand formula is P=a+bQ, with b = change of price/change of demand quantity b = -20/500 = -0.04 By substitution: 400 = a -0.04 (5,000) 400 = a – 200 a = 600 Hence: P= 600 – 0.04QThe change in price is a drop/fall of 20 and the quantity increases by 500
so its a – 20 / 500
which gives a -0.04 for bIf a = 600 which you can see and agree
400 = a – 200
600 = aso P = a – bq
Sorry for not being clear enough
It states that in the kaplan text
6 Procedure for establishing the optimum price
Within note 1It states that b always negative because of the inverse relationship between price and quantity
P = a – bQ
Where
P is the selling price
Q is the quantity demanded at that price
a = theoretical maximum price (if price is set at ‘a’ or above, demand will be zero)
b = the gradient of the line, calculated by = ?P / ?Qit is always negative because of the inverse relationship
P = a – bq
so it will always be a negativeHi,
when using P=a-bQ
first for b= -20/500= -.040
solving for a 400=a-(-.04) x 5000
a=400-200=200so the demand equation P=200-(-.04)Q
which is P=200+.04QCan you please confirm again
Thanks,
The demand formula is P = a + bQ, with b = change of price/change of demand quantity
b = –20/500 = –0.04
By substitution:
400 = a –0.04 (5,000)
400 = a – 200
a = 600Hence: P = 600 – 0.04Q
b = the gradient of the line, calculated by = ?P / ?Q
it is “always” negative because of the inverse relationshipHi Tutor,
I got what you mean that we have to consider the absolute value of “b” and in the equation always it should be negative .
Am I right ?
Thank you very for clarification.
Thanks,
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