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In addition to the hard-drive-based iPod, Apple produces a flash-based audio player. Its 512MB iPod Shuffle (which does not have a hard drive) sold for $99 in 2005. According to iSuppli, Apple’s per-unit cost of manufacturing the Shuffle is $45.37 (Brian Dipert, “Song Wars: Striking Back Against the iPod Empire,” www.reed-electronics.com, June 9, 2005). What is Apple’s price/marginal cost ratio? What is its Lerner Index? If we assume (possibly incorrectly) that Apple acts like a short-run profit-maximizing monopoly in pricing its iPod Shuffle, what elasticity of demand does Apple believe it faces

Category : Micro Economics | Answer: 1 1 Month Ago

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The price/marginal cost ratio is 99/45.37 = 2.18. The Lerner index is L = (p − MC)/p = 0.542, and the elasticity ε  = - 1/L = - 1.85

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