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Exercise 1.

1
A company has experimented with pricing its flagship product (see table below)

QUANTITY 20 25
PRICE DKK 20 10

a) Estimate and show graphically in Excel the inverse demand function for the company’s flagship
product (Hint: use Excel to find the formula using the trendline).

DEMAND
25

20

15
PRICE

Price DKK
10 P = -2Q + 60
Linear (Price DKK)
5

0
0 5 10 15 20 25 30
QUANTITY

Inverse demand is 𝑃𝑑 = −2𝑄 + 60

b) At which combination of quantity and price does the company maximizes total revenue?

TR is maximized when MR=0


𝑇𝑅 = −2𝑄 2 + 60𝑄
𝑀𝑅 = −4𝑄 + 60
−4𝑄 + 60 = 0
−4𝑄 = −60
𝑄 = 15

𝑃 = −2 ∗ 15 + 60
𝑃 = 30 𝐷𝐾𝐾

Exercise 1.2
The inverse demand function you derived in question a) exercise 1.1 a is actually the inverse
demand for liquorice pipes (Danish: Lakridspiber – a famous piece of candy).

The direct supply function for liquorice pipes is: 𝑄𝑠 = 𝑃 − 15

a) Determine the equilibrium price and quantity both mathematically and graphically on
Excel.

𝑄𝑠 = 𝑃 − 15
𝑃𝑠 = 𝑄 + 15

𝑃𝑑 = 𝑃𝑠
−2𝑄 + 60 = 𝑄 + 15
3𝑄 = 45
𝑄 = 15

𝑃 = −2 ∗ 15 + 60
𝑃 = 30

EQUILIBRIUM
70

60

50

40
PRICE

30 DEMAND

20 SUPPLY

10

0
0 5 10 15 20 25 30
QUANTITY

Now something happens to the supply of liquorice pipes. The new supply function is Qs = P

b) Find the new equilibrium


𝑃𝑑 = 𝑃𝑆
−2𝑄 + 60 = 𝑄
3𝑄 = 60
𝑄 = 20
𝑃 = −2 ∗ 20 + 60
𝑃 = 20

NEW EQUILIBRIUM
70
60
50
40
PRICE

DEMAND
30
SUPPLY
20
10 SUPPLY 2

0
0 10 20 30
QUANTITY

c) What can explain the change in supply?

The change is due to a non-price determinant, such as better technology, weather, price
of related products, decrease in interest rates. They all lower the cost and increase the
quantity supplied.

A news-story breaks on a possible ban on liquorice pipes by the EU. The direct demand now
changes to: 𝑄𝑑 = 45 − 0,5𝑃

d) Find the new equilibrium

𝑄𝑑 = 45 − 0.5𝑃
−0.5𝑃 = 𝑄 − 45
𝑃𝑑 = −2𝑄 + 90

−2𝑄 + 90 = 𝑄
3𝑄 = 90
𝑄 = 30

𝑃 = 30

e) This commodity experienced an increase in both supply and demand. Which conclusion can we
make about the effect on equilibrium price and quantity?

In the long Run the market adjusted and came back to the original price at a higher quantity.

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