Pricing the iPod

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Pricing the iPod
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(No Transcript)
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iPod Demand and Revenue Table
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iPod Demand and Marginal Revenue curves
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iPod Demand and Marginal Revenue curves
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iPod Price and Profits with Marginal Cost of
100
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Marginal cost of 100
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iPod Price and Profits with Marginal Cost of
50
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iPod Price and Profits with Marginal Cost of
25
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What do they really cost?

• 4 GB Nano is 149
• 8 GB Nano is 199

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Why doesnt 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?

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If demand for a monopolists 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

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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 wont increase his
  costs, so his profit must increase.

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A monopolist faces a demand curve with equation
P100-Q. What is the equation for its marginal
revenue?

• MR200-Q
• MR100-Q
• MR100-2Q
• MR200-2Q
• MR100-Q2

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With linear demand, MR is a straight line with
same intercept, twice as steep as demand. If
demand equation is P100-Q, Marginal revenue is
MR100-2q
100
Green Line Demand Curve 100-Q
Pink Line MR curve, 100-2Q
50
100
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A monopolist faces a demand curve with equation
P100-Q. Its total costs are 10Q. What are
its marginal costs?

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

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Marginal cost is the extra cost of producing one
more unit if output is Q. Therefore marginal
cost is 10(Q1)-10Q10.

• Calculus answer
• Marginal cost is derivative of 10Q with respect
  to Q, which is 10.

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A monopolist faces a demand curve with equation
P100-Q. Its total costs are 10Q. How much
should it produce to maximize its profits?

• Q100
• Q50
• Q45
• Q30
• Q25

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How do we find that?To maximize profits, the
monopolist sets marginal revenue equal to
marginal cost. The equation is 100-2Q10. The
solution is Q45.
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A monopolist faces a demand curve with equation
P100-Q. Its total costs are 10Q. What price
should it charge to maximize profits?

• P60
• P55
• P50
• P45
• P40

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How do we find that?We found that the profit
maximizing quantity is Q45.Since the demand
curve is P100-Q, it must be that the price is
100-4555 when profits are maximized.
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Diagram for profit maximizing monopoly
100
Green Demand Curve 100-Q
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Blue Marginal Cost Curve
50
100
45
Pink MR curve, 100-2Q
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A monopolist faces a demand curve with equation
P100-Q. Its total costs are 10Q. How much
profits can it make?

• 2025
• 200
• 1800
• 600
• 950

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Diagram for profit maximizing monopolyMaximum
profit is 45x452025.
100
Green Demand Curve 100-Q
55
Profit
10
Blue Marginal Cost Curve
100

45
Pink MR curve, 100-2Q
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And On to our Lecture