In addition to the hard-drive-based iPod, Apple produces a flash-based audio pla

Question

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 was $45.37. What was Apple's price/marginal cost ratio? What was its Lerner Index? If we assume (possibly incorrectly) that Apple acted like a short-run profit-maximizing monopoly in pricing its iPod Shuffle, what elasticity of demand did Apple believe it faced?

Explanation / Answer

PRice to marginal cost = 99/45.37 = 2.18.

Lerner index = (P-MC)/P = 0.54.

Lerner’s index of monopoly power is equal to the inverse of the price elasticity of demand Ep. Elasticity = 1/0.54 = 1.84 is the elasticity.

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