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Chapter 5: Problem 6

In \(2010,\) Apple wanted to lower the price of downloading TV shows from iTunes from \(\$ 1.99\) to \(\$ 0.99\) But Apple had to get permission from, and convince, the management of the networks with whom they share the revenue from each download. Apple argued that lowering the price would benefit both Apple and the networks. Managers at the networks disagreed, and wanted the price kept at \(\$ 1.99\) a. What did Apple believe about the price elasticity of demand for downloaded shows? b. What did the networks believe about the price elasticity of demand for downloaded shows?

Short Answer

Expert verified
a. Apple believed that the price elasticity of demand for downloaded shows was elastic. Their thought was that by lowering the price, it would lead to more downloads, thus increasing total revenue. \n b. The networks believed that the price elasticity of demand for downloaded shows was inelastic, assuming that decreasing the price would not result in enough increased downloads to counterbalance the loss in revenue per download.

Step by step solution

01

Understanding Apple's belief

Apple believed that the demand for downloaded shows was elastic. An elastic demand is one in which the quantity demanded responds significantly to changes in price. Here, Apple believed that by lowering the price, it would lead to a higher overall download rate, hence increasing total revenue.
02

Understanding the Networks' belief

On the other hand, the networks believed that the price elasticity of demand for downloaded shows was inelastic. An inelastic demand is one where the quantity demanded does not respond significantly to changes in price. In this perspective, if the price is reduced, the total revenue from download would decrease, as they didn't believe the reduction would generate a larger download rate.

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Most popular questions from this chapter

The demand for bottled water in a small town is as follows: $$\begin{array}{cc} P(\text { per bottle }) & Q_{D} \text { (bottles per week) } \\ \hline \$ 1.00 & 500 \\ \$ 1.50 & 400 \\ \$ 2.00 & 300 \\ \$ 2.50 & 200 \\ \$ 3.00 & 100 \end{array}$$ a. Is this a straight-line demand curve? How do you know? b. Calculate the price elasticity of demand for bottled water for a price rise from \(\$ 1.00\) to \(\$ 1.50 .\) Is demand elastic or inelastic for this price change? c. Calculate the price elasticity of demand for a price rise from \(\$ 2.50\) to \(\$ 3.00 .\) Is demand elastic or inelastic for this price change? d. According to the chapter, demand should become less elastic as we move downward and rightward along a straight-line demand curve. Use your answers in \(b\). and \(c .\) to confirm this relationship. e. Create another column for total revenue on bottled water at each price. f. According to the chapter, a rise in price should increase total revenue on bottled water when demand is inelastic, and decrease total revenue when demand is elastic. Use your answers in \(b\). and \(c .\) and the new total revenue column you created to confirm this.

Some studies suggest that "tooth extraction" is an inferior good. Which measure of elasticity (price elasticity of demand, price elasticity of supply, income elasticity, or cross-price elasticity) would provide evidence to support this claim? What would we look for in this elasticity measure to determine if tooth extraction were inferior?

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