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Suppose all iPod owners consider only two options for downloading music to their MP3 players: purchase songs from iTunes or copy songs from friends’ CDs. With these two options, suppose the weekly inverse market demand for the Rolling Stones’ song “Satisfaction” P = 1.98 - 0.00198Q is The marginal cost to Apple Inc. of downloading a song is zero.

a. What is Apple’s optimal price of “Satisfaction”? How many downloads of “Satisfaction” does Apple sell each week?

b. Now suppose that Apple sells a version of the iPod equipped with software in which songs played on the iPod must be downloaded from iTunes. For this iPod, the inverse market demand for “Satisfaction” P =2.50 - 0.0129Q is What is Apple’s optimal price of downloads of “Satisfaction” for this new player? How many downloads of “Satisfaction” does Apple sell each week? 

Category : Micro Economics | Answer: 1 1 Month Ago

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Audio-PowerPoint answer by James Dearden is also available (11B iPod).

 

a. Setting MR = MC we get 1.98 − 2 × 0.00198Q = 0. Solving the equation we get Q* = 500. Plugging the quantity back in the inverse demand function we get P* = 0.99.

 

 

b. Setting MR = MC we get 2.58 − 2 × 0.0129Q = 0. Solving the equation we get Q* = 100. Plugging the quantity back in the inverse demand function we get P* = 1.29.

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