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Much of the cost of a new smartphone is in the research and development and in building...

Question:

Much of the cost of a new smartphone is in the research and development and in building manufacturing facilities. By contrast, the marginal cost of producing another phone is relatively low.

a) You have been hired by Apple to recommend pricing and marketing strategies for their next phone. On the graph, draw a hypothetical Average Total Cost curve, the Marginal Cost Curve, and a Demand curve for iPhones.

b) Show the area of net profit (or loss) under perfect competition as the difference between the average total cost and the average revenue (or the price). What will happen to the industry and the number of companies under competitive conditions? Why?

Perfect Competitive Market:

The perfectly competitive market involved no cost for the producer to enter or leave the market; thus, free entry and exit. Here, the Lerner index for the producers is zero, as the price is equal to marginal cost.

Answer and Explanation: 1

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a)

A hypothetical Average Total Cost curve, the Marginal Cost Curve, and a Demand curve for iPhones is shown below:

b)

Assuming that the...

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Perfect Competition: Definition, Characteristics & Examples

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Chapter 3 / Lesson 62
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Learn the definition, characteristics, and benefits of perfect competition. Review real-life examples of perfect competition between different companies.


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