Ch. 15 - market demand

Question 1

What is the inverse demand curve if the market demand curve is D(p) = 100 – 5p?

Answer 1

The inverse demand curve is P(q) = 200 - 2q

Question 2

How does an addict’s demand function for a drug compare to the market demand function?

Answer 2

An addict’s demand function may be very inelastic, but the market demand function might be quite elastic.

Question 3

What factors contribute to the elasticity of market demand for a drug?

Answer 3

Whether to consume a drug at all could be price sensitive. Adjustment in market demand on the extensive margin contributes to elasticity.

Question 4

If D(p) = 12 – 2p, what price will maximize revenue?

Answer 4

Revenue is R(p) = 12p - 2p^2, which is maximized at P = 3.

Question 5

What is the revenue function if the demand curve is D(p) = 100/p?

Answer 5

Revenue is pD(p) = 100, regardless of the price, so all prices maximize revenue.

Question 6

True or false? In a two good model, if one is an inferior good, the other must be a luxury good.

Answer 6

True. The weighted average of the income elasticities must be 1, so if one good has a negative E, the other must have an E greater than 1.