You are an economic consultant charged with advising Apple on pricing strategy o

Question

You are an economic consultant charged with advising Apple on pricing strategy on its Ipad. Apple's research dept. estimated in late 2013 that the (own) price elasticity of demand for its Ipad tablet E= -1.2 over its current price range. Use this given info to provide consultation to Apple under each of the following scenarios. A. if Apple wants to increase its revenues from Ipads, would you recommend that Apple raise or lower the price of Ipads? Explain economic rationale behind your recommended pricing strategy. B. Now suppose Apple pursues a strategy of increasing market share. if Apple wants units sold of Ipads to rise by 6% over the next period, calculate the required percentage change in price of Ipads you would recommend to Apple to achieve this target. show steps and state recommendation. C. Some markets analysts argue that the demand for the ipad has become more price elastic over in recent years. What factors is this specific market may have increased the (price) elasticity of demand of Ipads?

Explanation / Answer

(a) Price elasticity of demand for Ipad tablets, E = -1.2

The price elasticity is greater than one, this implies that demand is elastic.

When demand for a good is elastic, increase in its price decreases total revenue and vice-versa.

So, given the elastic demand for Ipads, if Apple wants to increase its revenue from Ipads, it must lower the price of Ipads.

(b) Apple wants units sold to rise by 6%. This means it wants quantity demanded of Ipads to rise by 6%. Quantity demanded can only increase if price falls because of inverse relationship between two.

price elasticity of demand for Ipad tablets, E = -1.2

% increase in quantity demanded = 6%

E = % increase in quantity demanded/% decrease in price

% decrease in price = 6%/1.2

% decrease in price = 5%

Thus, Apple should decrease the price of Ipad by 5%, if it wants to achieve 6% incresae in units sold of Ipads.

(c) Factors that may have increased the elasticity of demand for Ipads are as follows -

1. In recent years, many firms have launched the tablets in the market. These are acting as substitute for Ipads and as we know that more the number of substitutes of a good. elastic is the demand for it.

So, this increase in number of substitutes has resulted in increase in elasticity of demand for Ipads.

2. In recent years, global economy and especially US economy has been in recessionary mode. Being a premium product, demand for Apple Ipads is already elastic. Recessionary impact has resulted in decrease in incomes in general.

when income falls, demand for premium goodsd decline more rapidly and thus demand for them becomes more elastic.

This is the reason why demand for Apple Ipads is becoming more elastic.

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