Question

Suppose that a technophile is willing to pay $800.00 now for a new iPhone 11, but is only willing to pay $400.00 if he/she has to wait a year to buy it. Rest of the general public is willing to $500.00 for a new iPhone 11 whether he/she buys it now or after one year. There are only two time periods and the marginal cost of an iPhone 11 is $250.00. Assume that there are equal number of technophiles and general people. Ignore the time value of money and answer the question as if there is one technophile and one person from the general public. If the iPhone is priced at $800.00 for today and at $500.00 for sale one year from today, how much will be the profit?

Answer 1

Solution:

The willingness to pay for iphone11 by a technophile is $800 today, while general person will pay only $500. If today, the price for iphone11 is $800, it exceeds the maximum willingness to pay by the general person (500 < 800), so that person will not buy the iphone today, and wait for it the next year.

If the iphone is targeted for technophile for next year, when his/her willingness is only $400, which is lower than the price of second period, and thus, technophile will not buy in second period.

Profit = price - marginal cost

Thus, technophile will buy in first period, generating a profit of (800 - 250 =) $550, and general person will buy in second period generating a profit of (500 - 250 =) $250. Thus, total profit for two periods (ignoring time value of money) will be 550 + 250 = $800.