(iv) If we operate under the assumption of ceteris paribus , what is the best li
ID: 1199448 • Letter: #
Question
(iv) If we operate under the assumption of ceteris paribus, what is the best linear representation of the demand faced by the firm [please provide the equation for the demand in terms of Q = f(P)]. Hint: This is just solving for the equation of the line…so solve for slope and intercept.
Recall that to get the equation of a line we can choose one point and note:
(Y – Y1) = M(X – X1) à in this case your point would be (X1, Y1) à (P,Q) where M =
(v) If we continue to operate under the assumption that the demand is linear, what prediction can you make about the firm's level of sales at the price of $8? Use your solution to predict this.
Explanation / Answer
iv.
Leaner representation of the demand:
Q = a – bP
Here, “a” is constant factors other than price (like income factor). “b” is slop. Q is quantity and P is price.
Since (Y – Y1) = M(X – X1) is a straight line equation, M = slope.
M = (Y – Y1) / (X – X1)
Therefore, the leaner representation would be as below:
Q = a – {(Y – Y1) / (X – X1)}P
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