Question

In: Economics

2. When Apple introduced its first iPhone, it had few competitors and so it set a...

2. When Apple introduced its first iPhone, it had few competitors and so it set a price of $500 when its unit cost was $350. The economics consulting firm it hired to estimate the demand elasticity confirmed this was the optimal price. Since then, entry into the mobile market has occurred that make customers more price conscious. When it brought the economics consulting firm back to estimate the demand price elasticity, it found that demand had become more price elastic at -4. Also, Apple has lowered its unit cost to $300 by finding cheaper labor.

  • a. What price should Apple charge now?

  • b. Are there any other elasticities Apple should consider as it sets a new price?

Solutions

Expert Solution

a) Use P = MC * ed / (ed + 1)

P = 300 * (-4/-3)

= $400

Apple should charge a price of $400

b) there are other elasticity is as well such as the income elasticity which measure the how the consumption is changed when consumer's income changes. There is advertising elasticity which measures the response of consumption when there is advertising and cross price elasticity which measures the change in the quantity demanded when the price of related goods changes such as the price of rivals' brands

Rahul Sunny answered 2 years ago
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