Davis, Spring 2006
KEY
E303, Problem Set #5
1
. Chez What
has recently opened a stand between the Commons and the School of Business.
They sell mostly breakfast items, particularly coffee, and croissants.
The operators are
particularly concerned about the demand for croissants.
In an effort to assess the wisdom of their
pricing strategy, they asked an economist client to estimate the demand for croissants sold at
Chez What.
He came with the following information.
Q = 1022P  10P
c
+ 15P
a
Where P = the price of croissants,
P
c
= the price of coffee sold at Chez What, and P
a
= the price
of coffee sold at the nearby Alpine bagel bakery
a. Suppose that the price of coffee at Chez What is $1 and that the price of coffee at the Alpine
Bagel Bakery is $2 per cup.
Calculate the
inverse
demand curve (e.g., express price as a function
of quantity).
Demand:
Q
=
102 – 2P – 10(1) + 15(2)
=
102 – 2P +20
=
122 – 2P
Inverse demand ____
P = 61  .5Q
________________________
For parts b and c assume that the price of croissants is $1.
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 Fall '08
 SHRESTHA
 Economics, Price Elasticity, Supply And Demand, Alpine Bagel Bakery

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