Question

4. Your firm produces a computer software called "Model It”, which is sold to other businesses. Its demand is estimated to be: QM = 660 – 0.4PM +2Ps + 0.5Y, where, QM denotes units sold of "Model It” software, PM denotes "Model It's” price, Ps denotes the price of a best-selling competitor, and Y is the average income of its consumers. The model is statistically significant Currently, PM= $550, Ps = $800, and Y = 80. What is the estimated quantity demanded (QM) for "Model It" software? 1 point Given that currently, Ps = $800 and Y = 80, state the demand function for "Model It" in the format QM = 0o + OjPm and its demand curve (inverse demand function) PM= a - bQM. 2 points c. Assume that the price of the competitor's product (Ps) changes from $800 to $750 and that Y is still $80, state the new demand function for "Model It" (the format should be QM= Clo + Q1PM) and its inverse) demand curve (PM= a - bQm). 2 points When visualize this demand relationship as a demand curve, how would the change in Ps from $800 to $700 be represented (shift left, shift right, movement up along, or movement down along)? 1 point

Answer 1

Qm = 660 -0.4Pm + 2Ps +0.5Y Substitute given values to find Qm: Qm = 660 – 0.4Pm + 2Ps + 0.5Y Qm = 660 -0.4(550) + 2(800) + 0.5(80) Qm = 660-220 + 1600 + 40 Qm = 2080 units b) Substitute given values to find Qm: Qm = 660 -0.4Pm + 2Ps + 0.5Y Qm = 660 -0.4Pm + 2(800) + 0.5(80) Qm = 660 -0.4Pm + 1600 + 40 Qm = 2300 -0.4Pm Or, Pm = 5750 - 2.5Qm Substitute given values to find Qm: Qm = 660 – 0.4Pm + 2Ps + 0.5Y Qm = 660 -0.4Pm + 2(750) + 0.5(80) Qm = 660 -0.4Pm + 1500 + 40 Qm = 2200 -0.4Pm Or, Pm = 5500 - 2.5Qm A change in Ps will be represented by a leftward shift of demand curve (since decrease in Ps reduces Qm)