Question

In September 2007, Dongmei Li of Queens, N.Y., sued Apple for cutting the price of iPhone from $599 to $399. Li claimed that the price cut "injured" her because she could not make as much profit by reselling the phone as those who had bought it for $399.

Suppose Li's income was $5,000 and that she purchased her iPhone in June 2007 for $599 because she wanted one for personal use. Ignore sales taxes.  

A) Draw Li's budget line before the price cut.

B) On the same graph, show Li's best affordable bundle before the price cut and draw an indifference curve that passes through it.

C) On the same graph, draw Li's budget line after the price cut.

D) On the same graph, show Li's new best affordable bundle.

E) Was Li "injured" economically as she claims she was? Fully explain your answer and provide economic intuition.

Answer 1