Pricing the iPod

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# Pricing the iPod - PowerPoint PPT Presentation

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

What do they really cost?
• 4 GB Nano is \$149
• 8 GB Nano is \$199
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?
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?
• 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.

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
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

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

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

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
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.
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
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

100

Green Demand Curve

100-Q

55

Blue Marginal Cost Curve

50

100

45

Pink MR curve,

100-2Q

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

100

Green Demand Curve

100-Q

55

Profit

10

Blue Marginal Cost Curve

100

45

Pink MR curve,

100-2Q