1) Using the scenario listed below Figure 1, write a demand function where demand for Apple Watch is a function only of the price of Apple Watch.

2) Estimate the average variable cost from Exhibit 2 and section on cost considerations. What assumptions underlie the estimate?

3) What is your best estimate of marginal cost? What assumptions underlie the estimate?

4) Assume Apple incurs a fixed cost of $1million. Use the previous estimated demand function and cost estimates to find the profit maximizing price. Would you recommend that Apple raise or lower prices from $349?

5) What is the revenue maximizing price? Is this higher or lower price compared to the one that maximizes profits?

6) Suppose fixed costs increase to $5 million. What is the new profit maximizing price? Is it higher, lower, or the same as before?

QAW=150,0002400PAW+1520PGears+1200PPebble1200PiPhone6+44A1 - QAW is the quantity demanded of the Apple Watch per week. - PAW is the price of the Apple Watch (dollars per unit). - PGears is the price of the Samsung Gear S watch (dollars per unit). - Pebble is the price of the Pebble Steel (dollars per unit). - PiPhone6 is the price of the mid-range iPhone 6 smartphone (dollars per unit). - A is the quarterly targeted advertising budget for the Apple Watch (in thousands of dollars per quarter). As the team prepared for launch, they contemplated a scenario with the following variable values: PAW=$349,PGears=$380,PPebble=$220,PiPhone6=$299,A=$15,500. Regression analysis results showed the coefficient of determination to be 0.7581 and the standard error of the estimate to be 30,000 . Cost Considerations According to an Apple Watch cost analysis by the Wall Street Journal of May 1, 2015, variable hardware and manufacturing costs per unit were estimated at $83.70. Cost estimates did not include intellectual property, royalties and licensing fees, shipping, logistics, and other channel costs. One analyst estimated these figures could amount to at least as much as the hardware costs. 17 (Please see Exhibit 2 for smartwatch cost structure.) A reasonable variable cost estimate was $178 per unit