INVERSE DEMAND FUNCTION

July 2018, Paper-II
Question
Which amongst the following is a correct description of the inverse demand function? [Where p=price, D=demand, and y=income.]

a) p=f (D)
b) D=f (p)
c) D = f(1/p)
d) p = f(D, 1/y)

Answer A
 The inverse demand function views price as a function of quantity. Quantity demanded, Q, is a function of price; the inverse demand function treats price as a function of quantity demanded, and is also called the price function.

 The inverse demand function is the same as the average revenue function, since P = AR. To compute the inverse demand function, simply solve for P from the demand function. For example, if the demand function has the form Q = 240 – 2P then the inverse demand function would be P = 120 – 0.5Q.