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Hi John,
I have come across a question in the Kaplan exam kit which has confused me a bit The question is:
The following price and demand combinations have been given:
P1 = 400, Q1 = 5,000
P2 = 320, Q2 = 5,500The variable cost is a constant $80 per unit and fixed costs are $600,000 pa.
What is the demand function?
I worked out what B was which was correct, but when it came to A I got it wrong.
I thought A was – current selling price (400) + b (0.04) x curr. demand (5000)
However they have substituted the P1 & Q1 figures right into the demand function to work out A.
I can do that ok if that is the way to do it. I just want to understand when i am supposed to do that and why my way of working A didn’t work?
.Hope that makes sense.
It doesn’t matter which way you calculate A.
However what you have done is wrong because you have 0.04 appearing for some reason.
B = 80/500 = 0.16Therefore A = 400 + (0.16 x 5,000) = 1,200.
Have you watched my free lectures on pricing?
Hi John, Yep i’ve watched the lecture (they are great by the way).
The answers say that B is 0.04 which is what I got and that A is 600 and therefore
P = 600 – 0.04 Q
I wasn’t able to get A as 600
In that case you must have copied out the question wrongly, because on what you originally typed b is certainly not 0.04 (it is 0.16) and a is certainly not 600 (it is 1,200).
(You can see that it is wrong yourself, if A was 600 and B was 0.04, then when demand is 5,500 the price would be 600 – (0.04 x 5,500) = 380, which is not the price that you typed out in your first post!).
Yes i have mistyped the figure for P2 it should be £380, which now agrees to B as 0.04.
Do you know where I went wrong with A?
Thanks for your help.
Well maybe there is a fault on your calculator, because you wrote that you had got:
A = 400 + (0.04 x 5,000)
That is correct and is equal to 600 !!
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