Question

In​ 2015, Apple introduced the Apple Watch. Assume that the cost of producing the 38mm Apple Watch Sport was ​$88. The price was ​$331. What was​ Apple's price/marginal cost​ ratio? What was its Lerner​ Index? If Apple is a​ short-run profit-maximizing​ monopoly, what elasticity of demand did Apple believe it​ faced?

Answer 1

Apple's price/marginal cost ratio, Lerner index, and the elasticity of demand is 3.76, 2.76 and - 0.36 respectively.

Step-by-step explanation:

a. The computation of apple's price/ marginal cost ratio is shown below:

Price/ marginal cost ratio = Price ÷ cost

= $331 ÷ $88 = 3.76

b. The computation of Lerner index formula is shown below:

Lerner index = (Price - marginal cost) ÷ price

= ($331 - $88) ÷ $88

= $243 ÷ $88

= 2.76

c. The computation of elasticity of demand is shown below

Elasticity of demand = - 1 ÷ Lerner index

= - 1 ÷ 2.76

= - 0.36

Hence, apple's price/marginal cost ratio, Lerner index, and the elasticity of demand is 3.76, 2.76 and - 0.36 respectively.