Question

In: Economics

Assume that the Samsung Galaxy smartphone has become more popular, which has increased its demand and...

Assume that the Samsung Galaxy smartphone has become more popular, which has increased its demand and decreased the demand for iPhones at the Verizon store in Dallas. This has caused the annual quantity sold of the iPhone to fall from 800 to 512. Assume that the annual carrying cost per unit for holding an iPhone in inventory is $40 and the order fixed cost is $10.

  1. The economic order quantity for the iPhone is
  2. The average inventory of iPhones is
      
  3. Explain the effect of this situation on the prices of the iPhone and the Samsung Galaxy.
  4. Explain the effect of this situation on the profits of the iPhone and the Samsung Galaxy.
  5. Explain the type of market structure for these two products.

Solutions

Expert Solution

Here,

Sales = D = 512

Cost per order = C = $10

Holding cost = H = $40

Thus,

answer: EOQ = 16 units

When using EOQ method, average inventory should be the half of EOQ.

Average Inventory =

answer: Average Inventory = 8 units

Effect on price of iPhone and Samsung Galaxy

Price of iPhone will fall, and that of Samsung Galaxy will rise.

This is because of demand exceeding supply for Samsung. For iPhone, it is the opposite.

Effect on profits of iPhone and Samsung Galaxy

Profit of iPhone will fall, and that of Samsung Galaxy will rise.

Samsung will be able to sell more units at a high price.

Type of market structure

This market clearly appears to be a Duopoly.

This is a form of Oligopoly where two large firms dominate the entire market. The pricing decision of both firms affects each others' profits. One firm's increased profits comes at the expense of the other firm.

Rahul Sunny answered 2 years ago
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