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Pricing the iPod

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Pricing the iPod

- 4 GB Nano is $149
- 8 GB Nano is $199

- 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?

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

- 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.

- MR=200-Q
- MR=100-Q
- MR=100-2Q
- MR=200-2Q
- MR=100-Q2

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

- $10 for all quantities
- $10+Q
- $(100/Q)-1
- $100-2Q
- $100-Q

Calculus answer:

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

- Q=100
- Q=50
- Q=45
- Q=30
- Q=25

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.

- P=60
- P=55
- P=50
- P=45
- P=40

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.

100

Green Demand Curve

100-Q

55

Blue Marginal Cost Curve

50

100

45

Pink MR curve,

100-2Q

- $ 2025
- $200
- $1800
- $600
- $950

100

Green Demand Curve

100-Q

55

Profit

10

Blue Marginal Cost Curve

100

45

Pink MR curve,

100-2Q