What is the relationship between the price in part 5a and elasticity?

QuestionAssignment for Chapter 2 This is your first assignment and it is based on what we covered in Chapter 2.As you recall, in Chapter 2 we discussed the demand equation of the functional form: = ? Where P is the price of the product and Q is quantity demanded. There are twoparameters in this equation: the intercept “a”, and the slope “b”, with which you are nowvery familiar. If you don’t remember what these are, please refer to your notes andrefresh your memory.Your assignment is to create a product (a real or an imaginary product) for your businessand construct a demand equation with the above functional form for your product.Specifically, you are asked, as an expert for your product, to come up with your bestguess for the intercept “a”, and the slope “b”. With these parameters you can create thedemand equation for your product.Based on this general overview, this assignment requires answering the followingquestions or instructions. The format of your presentation should be based on thedescription given in the document titled “General Information and Requirements forAssignments.pdf”. Following the format described in this document is extremelyimportant and your grade will be based on presenting your assignment using this format.1. (10 Points) Describe your product and its characteristics (What is it, how is it used,what is the competitive landscape for your product, what are the current marketprices, etc.). I emphasize that you are the one who knows the most about yourproduct. Therefore, if any description or estimation does not conform to commonsense, it indicates that you are not familiar with your product and with theassignment.2. (10 Points) As the manager of your product, you are in the best position to provide abest guess for intercept “a”, and slope “b”. While you cannot estimate these numbersusing statistical methods, your knowledge of your product and the market in whichyou want sell your product, should equip you with the expertise to have a bestprofessional guess for intercept “a”, and slope “b”. In other words, these numbersshould be consistent with your pricing policy and demand conditions for yourproduct. These are not simply some random numbers you guess. If you know yourproduct, you should be able to come up with a rational guess.Describe the process by which you guessed intercept “a”, and slope “b”. Thisdescription crucially depends on fully understanding what these parameters mean andimply. Simply stating that the numbers are the intercept and slope will not give youany credit. Feel free to round the number so that you can work with it easily and thatyour calculations don’t get overly complicated. 3. (45 Points) This question has five sections. Each section asks you to calculate a set ofnumbers based on the following description. Specify a range of prices for yourproduct which must include high and low prices. Obviously, you can sell yourproduct for any price you want. However, you are asked to come up with a range ofnumbers for the price of your product. For example, choose three high prices belowthe highest price you can sell the product for and three low prices (short of givingyour product away free of charge), and one price in the middle of the high and low.You should identify at least 7 price points between the maximum and minimumprice.a. (10 Points) For each price point (including the maximum and minimum),calculate the quantity demanded from your demand equation for that price. Youshould show how this calculation was done mathematically for at least one price.b. (10 Points) For every pair of price and quantity (question 3 and 3a) , calculate thepoint price elasticity of demand at that point (this is not an arc elasticity). As in insection C(a), you should show your work for at least one calculation.c. (10 Points) For what price-quantity combination is the price elasticity of demandfor your product is -1? Again, you should show your work or ample explanationof your work to indicate how you calculated this price and quantity. It is notsufficient to simply cite an elasticity number. If this combination happened toexist in one of your choices below, you should still calculate these numbers as ifyou didn’t know what they were.d. (5 Points) Calculate the revenue you obtain at each price-quantity combinationand include that information in the table next to price, quantity, and elasticity.e. (10 Points) Include the prices, quantities, elasticities, and revenues you calculatedin questions 3, 3a-3d in the following table:Price Quantity Elasticity Revenue Price 1 (Highest)Price 2Price 3Price 4Price 5Price 6Price 7 (Lowest)It is important to complete this table with the numbers you calculated in sections3a-3d.4. This section has two parts. These parts should be drawn on two different graphswhere the graph in part b is shown below the graph in part a. Using Excelsignificantly facilitates these drawings. Be sure your graphs are labeled and titled. a. (10 Points) Using the equation of your demand, with the price and quantity,please draw the demand curve for your product with the price on the verticalaxis and quantity on the horizontal axis. Also draw the marginal revenuecurve. Be sure to properly label the graphs.b. (10 Points) On a separate graph, draw the revenue curve (as a function ofquantity, i.e. quantity on the horizontal axis). Be sure your revenuecalculation is correct. If not, your graph will not be drawn correctly and willnot get proper credit.5. (15 Points) What conclusions do you draw from the graphs you created in part D?Specifically,a. At what price do you maximize revenue?b. What is the relationship between the price in part 5a and elasticity?c. What is the relationship between the price in part 5a and marginal revenue?
 

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