Question

When the iPod was first introduced by Apple, it was a product so different to other portable music players that it was seen as being in its own market (ie: having features of a monopoly). Assume Apple sold the number of iPods to maximise profit. Which of the following statements are true: ם The quantity of iPods sold in the market would be larger if the market was perfectly competitive The price charged for an iPod when first introduced would have been higher than its marginal cost. The total profit earnt would have been calculated as the marginal revenue less marginal cost. Finding where the marginal revenue equalled the average total cost would have determined the profit-maximising quantity of iPods to produce

Answer 1

Having been a product with the traits of monopoly when it was first introduced, iPod's price would have been higher than its marginal cost. The quantity of iPod sold would obviously be determined at the point where the marginal revenue equals its marginal cost and not at the point where marginal revenue equals average total cost.

The total profit would be calculated as a difference between total revenue and total cost and not by the difference between marginal revenue and marginal cost.

And the quantity sold would be lesser than in perfect competition the market for iPod being closer to monopoly.

Option A and B are thus correct. That is, the quantity of iPods sold in the market would have been larger if the market was perfectly competitive and the price charged for an iPod when first introduced would have been higher than its marginal cost.

And option C and D are incorrect.