What is an inverse demand function? If the demand for a firm's product is given by the expression Q = 600 - 3P, what is the firm's inverse demand function? By how much would the firm have to change its price in order to increase sales from 300 units to 450 units?
What will be an ideal response?
The inverse demand function describes how much the firm must charge to sell any given quantity of its product. The inverse demand function is found by solving the demand function for P in terms of Q:
Q = 600 - 3P
3P = 600 - Q
P = 200 - Q/3
The price the firm charges to sell 300 units of output is P = 200 - (300/3) = 100. The price the firm charges to sell 450 units of output is P = 200 - (450/3) = 50. Therefore, to increase sales from 300 to 450 units, the firm must reduce price from $100 to $50.
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