Problem: Pricing Application

In 2019 Apple introduced a new product called Apple News Plus priced at $10 per month, which is a 400% markup over marginal cost (ie., k = 4). The launch was a disappointment, attracting only 1/2 million subscribers in the first year.

For this problem it is helpful to recall that optimal price is is given by:

p =c / [1 + 1/]

where c is marginal cost and is the price elasticity of demand.

a.What is the marginal cost of a subscription for Apple News?

b.In 2020, Apple ran a promotion that cut the price to $5 per month for one year. If sales doubled, what is the implied elasticity of demand for Apple News at the initial price?

c.At the end of the year marketing estimates elasticity of demand to be about -0.9. Marketing recommends to the CEO that they stick with the $5 price. The sales department recommends a modest price increase. Identify the key factors favoring each side.