Long-run competition. Much of the cost of a new smart phone 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 one graph: draw a hypothetical Average Total Cost (ATC) curve, the Marginal Cost curve, and a Demand (MU) curve for iPhones. (Hint: The point where Demand intersects MC should be below the ATC curve.)

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

c) Duplicate the ATC, MC, & MU graph from part b, but this time, show what happens if they can charge a monopoly price. Show the area of net profit as the difference between average total cost and the price multiplied by the number of phones sold (Profit = (P – ATC)*Q). How does this change consumer, producer, and total surplus?

d) What can Apple do to maintain a monopoly pricing strategy? Would their success depend on having very low fixed costs?