Inverse, Direct Demand Function and Point Price Elasticity
Copy and paste the following data into Excel:
Question 1: Run OLS to determine the inverse demand function (P = f(Q)); how much confidence do you have in this estimated equation? Use algebra to then find the direct demand function (Q = f(P)).
Question 2: What is the point price elasticity of demand when P=$42? How would you characterize demand when the price is around $42?
Question 3: What is the point price elasticity of demand when P=$24? How would you characterize demand when the price is around $24?
Question 4: To maximize total revenue, what would you recommend if the company was currently charging P=$42? If it was charging P=$24?
Question 5: Determine an equation for MR as a function of Q, and create a graph of P and MR on the vertical and Q on the horizontal axis.
P Q
$44 642
$42 1,108
$26 2,932
$24 3,465
$15 4,007
$10 4,821.