Part -3

Economics in Action 2: real world decision-making

Answer-1:The effects of 1995 reduced the demand for Apple's products. Thus the competitive reactions shifted Apple's demand curve to the left thereby reducing demand at each price level. The decision to preserve profit margins or cut prices depends on the price elasticity of Apple's products. If Apple's products have an elastic demand (which seems to be the true from the case), then apple should follow suit and cut prices. However, if the demand is inelastic (not likely to be true), then Apple should preserve its profit margins.

Answer 2: P= 4,500-.15QTotal Revenue = PxQ = 4,500Q - 0.15Q^2Marginal Revenue = 4,500 - 0.30QFor Profit Maximization MC = MRThus 1500 = 4,500 - 0.30Q=> Q = (4,500 - 1,500)/0.30=> Q = 3,000/0.30=> Q = 10,000

Put Q = 10,000 in the demand function to ge the price:P = 4,500 - 0.15x10,000 = 3,000

Thus Apple should price its product at 3,000 and sell 10,000 units.

Answer 3: Power Mac's user value had fallen by 600. This means that the demand curve has further shifted to the left by $600.Thus the new demand curve will beP = 4500 - 600 - 0.15Q=> P = 3900 - 0.15Q

If Apples stays at the $3000 price mark then quantity will be:3,000 = 3,900 - 0.15Q=> 900 = 0.15 Q=> Q = 6000

Thus sales will fall from 10,000 units to 6,000 units if Apple held its price of $3000P= 3,900-.15QTotal Revenue = PxQ = 3,900Q - 0.15Q^2Marginal Revenue = 3,900 - 0.30QFor Profit Maximization MC = MRThus 1350 = 3,900 - 0.30Q=> Q = (3,900 - 1,350)/0.30=> Q = 2,550/0.30=> Q = 8,500

Putting Q = 8,500 in the price function we getP = 3,900 - 0.15x8500=> P = 2,625

Thus according to the new policy Apple should see 8,500 units at $2,625 per unit