The Orange company has introduced a new music device called the J-Pod. The J-Pod is sold through Good Buy, a major electronics retailer. Good Buy has estimated that demand for the J-Pod will depend on the final retail price p according to the demand curve.
Demand D = 2,000,000-2,00p
The production cost for Orange is $100 per J-Pod.
a. What wholesale price should Orange charge for the J-Pod? At this wholesale price, what retail price should Good Buy set? What are the profits for Orange and Good Buy at equilibrium?
b. If Orange decides to discount the wholesale price by $40, how much of a discount should Good Buy offer to customers if it wants to maximize its own profits? What fraction of the discount offered by Orange does Good Buy pass along to the customer?