Question

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The Orange company has introduced a new smartphone called the J-Phone. The J-Phone is sold through Good Buy, a major electronics retailer. Good Buy has estimated that demand for the J-Phone will depend on the final retail price, p, according to the demand curve:

d=2,500,000-3,000p

The production cost for Orange is $150 per J-Pod.

A. What wholesale price should Orange charge for the J-Pod?

Less than $300

Between $350 and $400

Between $330 and $350

Between $300 and $330

More than $400

B. At this wholesale price, what retail price should Good Buy set?

More than $580

Less than $500

Between $520 and $550

Between $550 and $580

Between $500 and $520

What is the profit for Orange at equilibrium (i.e. when the players set the wholesale and retail prices from Questions A and B)?

Less than $100,000

Between $120,000 and $140,000

Between $100,000 and $120,000

Between $140,000 and $160,000

More than $160,000

What is the profit for Good Buy at equilibrium (i.e. when the players set the wholesale and retail prices from Questions A and B)?

Between $100,000 and $120,000

Between $140,000 and $160,000

More than $160,000

Less than $100,000

Between $120,000 and $140,000

Answer 1

Demand curve : D=a-bP

Denote: Profit=(a-bP)x(p-c)

So p*=(a+bc)/2b

A)More than $400

Given that Demand D = 2,500,000 – 3,000p and the production costs for Orange is $150 per J-pod

which implies a=2,500,000

b=3,000

c=150

We get the optimal price by setting

P* = (2,500,000 + 3,000x150)/2*3000 =$491.667

So, Orange should change the wholesale price to $491.667 which is more than $400.

B)More than $580

At this wholesale price, for a retailer - Good Buy would set a retail price equal to :

P* = (2,500,000 + 3,000x491.667)/6000 = $662.50

C)More than $160,000

Profits for Orange at equilibrium :

( 1,250,000 - 1,500 x 491.667)(491.667 - 150) = $175,104,166.7

D)More than $160,000

Profits for Good Buy at equilibrium:

(2,500,000 - 3,000 x 662.5)(662.5 - 491.667) = $87,551,912.50