Pricing the ipod
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Pricing the iPod. iPod Demand and Revenue Table. iPod Demand and Marginal Revenue curves. iPod Demand and Marginal Revenue curves. iPod Price and Profits with Marginal Cost of $100. Marginal cost of $100. iPod Price and Profits with Marginal Cost of $50.

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Pricing the iPod

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Pricing the ipod

Pricing the iPod


Ipod demand and revenue table

iPod Demand and Revenue Table


Ipod demand and marginal revenue curves

iPod Demand and Marginal Revenue curves


Ipod demand and marginal revenue curves1

iPod Demand and Marginal Revenue curves


Ipod price and profits with marginal cost of 100

iPod Price and Profits with Marginal Cost of $100


Marginal cost of 100

Marginal cost of $100


Ipod price and profits with marginal cost of 50

iPod Price and Profits with Marginal Cost of $50


Ipod price and profits with marginal cost of 25

iPod Price and Profits with Marginal Cost of $25


What do they really cost

What do they really cost?

  • 4 GB Nano is $149

  • 8 GB Nano is $199


Why doesn t apple charge more

Why doesn’t Apple charge more?

  • Our class estimates suggest that with MC of

    $25-$50, Apple would maximize profits by charging $250.

  • Is there a reason for Apple to want bigger volume of iPod sales?

  • Hint: What about selling music downloads?


Pricing the ipod

If demand for a monopolist’s product is inelastic at the current price, he could increase his profits by reducing output, even if his marginal cost is very small.

  • True

  • False


Why is that

Why is that?

  • If demand is inelastic, then a small price increase and the resulting quantity decrease must increase revenue.

    So by cutting back quantity he increases revenue. Reducing quantity certainly won’t increase his costs, so his profit must increase.


Pricing the ipod

A monopolist faces a demand curve with equation P=100-Q. What is the equation for its marginal revenue?

  • MR=200-Q

  • MR=100-Q

  • MR=100-2Q

  • MR=200-2Q

  • MR=100-Q2


Pricing the ipod

With linear demand, MR is a straight line with same intercept, twice as steep as demand. If demand equation is P=100-Q, Marginal revenue is MR=100-2q

100

Green Line Demand Curve

100-Q

Pink Line MR curve,

100-2Q

50

100


Pricing the ipod

A monopolist faces a demand curve with equation P=100-Q. Its total costs are $10Q. What are its marginal costs?

  • $10 for all quantities

  • $10+Q

  • $(100/Q)-1

  • $100-2Q

  • $100-Q


Pricing the ipod

Marginal cost is the extra cost of producing one more unit if output is Q. Therefore marginal cost is $10(Q+1)-$10Q=$10.

Calculus answer:

Marginal cost is derivative of $10Q with respect to Q, which is $10.


Pricing the ipod

A monopolist faces a demand curve with equation P=100-Q. Its total costs are $10Q. How much should it produce to maximize its profits?

  • Q=100

  • Q=50

  • Q=45

  • Q=30

  • Q=25


Pricing the ipod

How do we find that?To maximize profits, the monopolist sets marginal revenue equal to marginal cost. The equation is 100-2Q=10. The solution is Q=45.


Pricing the ipod

A monopolist faces a demand curve with equation P=100-Q. Its total costs are $10Q. What price should it charge to maximize profits?

  • P=60

  • P=55

  • P=50

  • P=45

  • P=40


Pricing the ipod

How do we find that?We found that the profit maximizing quantity is Q=45.Since the demand curve is P=100-Q, it must be that the price is 100-45=55 when profits are maximized.


Diagram for profit maximizing monopoly

Diagram for profit maximizing monopoly

100

Green Demand Curve

100-Q

55

Blue Marginal Cost Curve

50

100

45

Pink MR curve,

100-2Q


Pricing the ipod

A monopolist faces a demand curve with equation P=100-Q. Its total costs are $10Q. How much profits can it make?

  • $ 2025

  • $200

  • $1800

  • $600

  • $950


Diagram for profit maximizing monopoly maximum profit is 45x45 2025

Diagram for profit maximizing monopolyMaximum profit is $45x45=$2025.

100

Green Demand Curve

100-Q

55

Profit

10

Blue Marginal Cost Curve

100

45

Pink MR curve,

100-2Q


And on to our lecture

And On to our Lecture


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