Pricing the iPod
iPod Demand and Revenue Table
Quantity Price Revenue6 $700 $4,200
10 $500 $5,00012 $450 $5,40017 $400 $6,80026 $350 $9,10046 $300 $13,80058 $250 $14,50074 $200 $14,80090 $150 $13,500
100 $50 $5,000
iPod Demand and Marginal Revenue curves
iPod Demand and Marginal Revenue curves
iPod Price and Profits with Marginal Cost of $100
Quantity Price Revenue Total Cost Profit6 $700 $4,200 $600 $3,600
10 $500 $5,000 $1,000 $4,00012 $450 $5,400 $1,200 $4,20017 $400 $6,800 $1,700 $5,10026 $350 $9,100 $2,600 $6,50046 $300 $13,800 $4,600 $9,20058 $250 $14,500 $5,800 $8,70074 $200 $14,800 $7,400 $7,40090 $150 $13,500 $9,000 $4,500
100 $50 $5,000 $10,000 -$5,000
Marginal cost of $100
iPod Price and Profits with Marginal Cost of $50
Quantity Price Revenue Total Cost Profit6 $700 $4,200 $300 $3,900
10 $500 $5,000 $500 $4,50012 $450 $5,400 $600 $4,80017 $400 $6,800 $850 $5,95026 $350 $9,100 $1,300 $7,80046 $300 $13,800 $2,300 $11,50058 $250 $14,500 $2,900 $11,60074 $200 $14,800 $3,700 $11,10090 $150 $13,500 $4,500 $9,000
100 $50 $5,000 $5,000 $0
iPod Price and Profits with Marginal Cost of $25
Quantity Price Revenue Total Cost Profit6 $700 $4,200 $150 $4,050
10 $500 $5,000 $250 $4,75012 $450 $5,400 $300 $5,10017 $400 $6,800 $425 $6,37526 $350 $9,100 $650 $8,45046 $300 $13,800 $1,150 $12,65058 $250 $14,500 $1,450 $13,05074 $200 $14,800 $1,850 $12,95090 $150 $13,500 $2,250 $11,250
100 $50 $5,000 $2,500 $2,500
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?
• 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.
1. True
2. 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?
A) MR=200-Q
B) MR=100-Q
C) MR=100-2Q
D) MR=200-2Q
E) 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
10050
Green Line Demand Curve 100-Q
Pink Line MR curve,100-2Q
A monopolist faces a demand curve with equation P=100-Q. Its total costs are $10Q. What are its
marginal costs?
A) $10 for all quantities
B) $10+Q
C) $(100/Q)-1
D) $100-2Q
E) $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.
Calculus answer:
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?A) Q=100
B) Q=50
C) Q=45
D) Q=30
E) 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?
A) P=60
B) P=55
C) P=50
D) P=45
E) 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
100
50
Green Demand Curve 100-Q
Pink MR curve,100-2Q
55
Blue Marginal Cost Curve
45
A monopolist faces a demand curve with equation P=100-Q. Its total costs are $10Q. How much
profits can it make?
A) $ 2025
B) $200
C) $1800
D) $600
E) $950
Diagram for profit maximizing monopoly
Maximum profit is $45x45=$2025.
100
100
Green Demand Curve 100-Q
Pink MR curve,100-2Q
55
Blue Marginal Cost Curve
Profit
45
10
And On to our Lecture