When Apple introduced its first iPhone, it had few competitors and so it set a price of $500 when its unit cost was $350. The economics consulting firm it hired to estimate the demand elasticity confirmed this was the optimal price. Since then, entry into the mobile market has occurred that make customers more price conscious. When it brought the economics consulting firm back to estimate the demand price elasticity, it found that demand had become more price elastic at -4. Also, Apple has lowered its unit cost to $300 by finding cheaper labor.
a. What price should Apple charge now?
b. Are there any other elasticities Apple should consider as it sets a new price?
a. Since the demand of the good has become elastic now with the entry of new firms in the industry, a decrease in the price level will increase total revenue of the firm. Thus, Apple should lower its price from $500 given that cost of production has decreased and demand of the good has become elastic.
b. Elasticity of supply also plays an impirtant role to judge whether Apple can increase supply in the short run or in the long run and price adjusts according to the value of elasticity of supply of phones.
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