When the price of squiggles is $700, 2200 units are demaded. When the price per

Question

When the price of squiggles is $700, 2200 units are demaded. When the price per unit of squiggles is $300, 4200 units of squiggles are demanded.

1) Use these two points and calculate the estimated demand function ( You are estimating a straight line demand function going through these two points. You can write P as a function of Q or R as function of P.)

2) Calculate the elasticity of demand between a price of $300 and price of $320

3) Calculate the elasticity of demand betwen a price of $700 and price of $720

4) Given your estimated demand function, how much would you estimate to be demanded when the price is $500?

Explanation / Answer

1. Let Price be P and Demand be Q

(P-300)/ (700-300) = (Q-4200)/(2200-4200)

=> Q = 5700-5P

2. Q(300) = 4200

Q(320) = 4100

Elasticity of demand = (-100/4200) / (20/320) = -0.38

3. Q(700) = 2200

Q(720) = 2100

Elasticity of demand = (-100/2200) / (20/720) = -1.636

4. Q = 5700 - (5*500) = 3200 units

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