During the 1990’s, Apple Computer saw its global share of the personal computer market fall from above 10% to less than 5%. Despite a keenly loyal customer base, Apple found it more and more difficult to compete in a market dominated by PCs running Microsoft’s Windows-based operating system. In 1995, Apple’s chief, John Schulley, insisted on keeping Mac’s markup as high as 50 to 55 percent, in the face of falling demand. At this time, the business of selling PCs was becoming more and more “commodity-like”. Indeed, the price elasticity facing a particular company was estimated to be very elastic. Using the relationship between elasticity and markup, carefully assess Schulley’s strategy.  

Characterize each of the following statements as true or false, and explain your answer.

A. Given a downward-sloping demand curve and positive marginal costs, profit-maximizing firms will always sell less output at higher prices than will revenue-maximizing firms.                             

B. Consider a consumption bundle consisting of soda, candy and cookies. If the price of cookies rises then substitution effect implies that the consumer will consume less of cookies, soda and candy.