Question: Suppose you have estimated the following direct demand function for a price setting firm: Q = 240-40P a. Find the equation for the inverse demand

Suppose you have estimated the following direct demand function for a price setting firm: Q = 240-40P

a. Find the equation for the inverse demand function

b. Find the equation for the Total Revenue function.

c. Find the equation for the Marginal Revenue function.

d. Find the value of output that maximizes Total Revenue. Find the price that maximizes Total Revenue.

e. Suppose the current price is $4. Calculate the own price elasticity of demand at this price.

f. If the firm were to increase price above $4, what would happen to Total Revenue? Explain your answer using the definition of elasticity, and your knowledge of whether demand is elastic, inelastic or unitary elastic at a price of $4.

g. Draw what is happening in part f using the two graph model used in class (with Demand and MR in the top graph and TR in the bottom graph directly below it). Be sure to label your initial price and quantity, initial TR and then your new price and quantity, and new TR. No numerical values are desired here-it will simply take you longer.

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