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-.15Q
Total Revenue = PxQ = 4,500Q - 0.15Q^2
Marginal Revenue = 4,500 - 0.30Q
For Profit Maximization MC = MR
Thus 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 be
P = 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 $3000
P= 3,900-.15Q
Total Revenue = PxQ = 3,900Q - 0.15Q^2
Marginal Revenue = 3,900 - 0.30Q
For Profit Maximization MC = MR
Thus 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 get
P = 3,900 - 0.15x8500
=> P = 2,625
Thus according to the new policy Apple should see 8,500 units at $2,625 per unit