Suppose demand for a firm’s semiconductor chips is:

q = 325 – 4P + 0.75P_R + 5A + 3.5Y

where P is the price of the firm’s semiconductor, P_R is the price of a competing chip, A is advertising expenditures (in $1000), and Y is average income (in $1000). Suppose P_R = 120, A = 15, and Y = 60.

1. Derive the inverse demand function of the firm

2. If the firm chooses a price of 130, how many chips does it sell?

3. Derive the following:

1. Income elasticity of demand (is the good normal?)
2. Advertising elasticity of demand
3. Cross-price elasticity of demand
4. Price elasticity of demand

4. Assume that a high cross-price elasticity is 0.2 or higher. Should the rival and the firm be in the same relevant market? Explain.

Answer rating: 100% (QA)

To derive the inverse demand function we rearrange the demand equation to solve for P q 325 4P 075PR ... View the full answer