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

2nd Edition

ISBN: 9780073375854

Author: B. Douglas Bernheim, Michael Whinston

Publisher: MCGRAW-HILL HIGHER EDUCATION

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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?
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