Monopolistic Competition: Apple is one of many firms that is a supplier in the market for smart phones. Apple's iPhones are considered to be relatively high-end smart phones due to their design's attention to style and their place in the ecosystem of complementary Apple products. Both qualities set them apart from other producers' smart phone offerings.
- Assume that Apple is currently earning short-run economic profits. On a correctly labeled diagram, show Apple's profit-maximizing output (Q*) and price (P*), as well as the area that represents the firm's profits.
- What happens to Apple's price, output, and profit in the long-run? Illustrate your answer on another diagram.
- At the profit maximizing prices you identified in parts (a) & (b), is Apple producing at the efficient scale? Support your answer with no more than two sentences.
- If you were Tim Cook, the CEO of Apple, and one of your analysts informs you that after looking carefully at the Apple Watch production data that P = MC at the current output level, would you want to increase, decrease or keep production constant? Support your answer with one sentence.