ACCA PM · Chapter 7 · Question 1 of 10
Phi Co currently sells 2,000 units of a product per month at $100 each. Market research shows that for every $5 increase in price, demand falls by 100 units (and vice versa). The variable cost is $40 per unit and fixed costs are unaffected by volume. In the demand equation P = a - bQ, what is the value of a?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: D) $200
Explanation
b = change in price / change in quantity = $5 / 100 = 0.05. Substituting P = 100 and Q = 2,000: 100 = a - (0.05 x 2,000), so a = 100 + 100 = $200. This is the price at which demand would fall to zero.
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