Q 3 4 5 solution needed 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? Demand for the Apple WatchThe Apple Watch team contemplated their U.S. launch strategy for early 2015, the first quarterof Apple Watch sales, and estimated the weekly demand function for the U.S. market. (SeeFigure 1 below.)This function included prices of what the team determined to be the mostsignificant competitors for the Apple Watch, in addition to other variables.Figure 1Qaw = -150,000 – 2400 PAw + 1520PGears + 1200 Ppebble – 1200 Piphone6 + 44 AQaw 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).Prebble is the price of the Pebble Steel (dollars per unit).• Piphones 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 ofdollars per quarter).As the team prepared for launch, they contemplated a scenario with the following variablevalues: PAw =$349, PGears =$380, PpPebble =$220, PiPhone6 =$299, A=$15,500. Regression analysisresults showed the coefficient of determination to be 0.7581 and the standard error of theestimate to be 30,000.Cost ConsiderationsAccording to an Apple Watch cost analysis by the Wall Street Journal of May 1, 2015, variablehardware and manufacturing costs per unit were estimated at $83.70. Cost estimates did notinclude intellectual property, royalties and licensing fees, shipping, logistics, and other channelcosts. One analyst estimated these figures could amount to at least as much as the hardwarecosts.7 (Please see Exhibit 2 for smartwatch cost structure.) A reasonable variable costestimate was $178 per unit. Exhibit 2Smartwatch Cost StructureDescriptionManufacturerComponentDisplay/TouchscreenTouchscreenCost20.501.34" diagonal, plastic OLED,272x340 pixels, with force touch andion-X cover glassARM Cortex-M3 (microprocessor)TPKTouchscreen ControllerComputing/IntelligenceApps ProcessorMemoryAnalog DevicesApps ProcessorApple$10.20$7.20NANDDRAMNAND - Flash 8GB, MLC NANDDRAM – SDRAM 512MBToshibaMicronLPDDR3TechnologyPower ManagementBT/WLAN$5.50$3.00BT/WLAN (Bluetooth and WirelessLAN) IEEES02.11 a/b/g/n, Bluetooth4.0BroadcomUser InterfaceAudio Codec$5.50Audio Codec (for digitizing audiostreams)Audio Power Amplifier Amplifies the soundNFC ControllerМахimNXPNear Field CommunicationsController (for payments, othertransactions)Near Field Communications boosterNFC BoosterSensorsAccelerometer/Gyroscope Accelerometer/Gyroscope – 6 axisOptical Pulse SensorAmbient Light Sensorams AG$3.00ST MicroPhoto sensor for heart rateLight sensor to adjust displaybrightnessLi-Polymer, 3.8V, 205mAh, 0.78WhEnclosure, wristbands, switches,printed circuit boards, misc.Inductive charger and adapter, extrawristband, carrying case, packagingams AGBattery PackOther MechanicalS0.80$16.50Other Box Contents$9.00Assembly Labor$2.50ТОTAL$83.70Adapted from information published through various sources, including the Wall Street Journal (May 1, 2015) andBusiness Wire (April 30, 2015) based on IHS Apple Watch Sport cost chart.

Question

Q 3 4 5 solution needed 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? Demand for the Apple WatchThe Apple Watch team contemplated their U.S. launch strategy for early 2015, the first quarterof Apple Watch sales, and estimated the weekly demand function for the U.S. market. (SeeFigure 1 below.)This function included prices of what the team determined to be the mostsignificant competitors for the Apple Watch, in addition to other variables.Figure 1Qaw = -150,000 – 2400 PAw + 1520PGears + 1200 Ppebble – 1200 Piphone6 + 44 AQaw 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).Prebble is the price of the Pebble Steel (dollars per unit).• Piphones 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 ofdollars per quarter).As the team prepared for launch, they contemplated a scenario with the following variablevalues: PAw =$349, PGears =$380, PpPebble =$220, PiPhone6 =$299, A=$15,500. Regression analysisresults showed the coefficient of determination to be 0.7581 and the standard error of theestimate to be 30,000.Cost ConsiderationsAccording to an Apple Watch cost analysis by the Wall Street Journal of May 1, 2015, variablehardware and manufacturing costs per unit were estimated at $83.70. Cost estimates did notinclude intellectual property, royalties and licensing fees, shipping, logistics, and other channelcosts. One analyst estimated these figures could amount to at least as much as the hardwarecosts.7 (Please see Exhibit 2 for smartwatch cost structure.) A reasonable variable costestimate was $178 per unit. Exhibit 2Smartwatch Cost StructureDescriptionManufacturerComponentDisplay/TouchscreenTouchscreenCost20.501.34&#34; diagonal, plastic OLED,272x340 pixels, with force touch andion-X cover glassARM Cortex-M3 (microprocessor)TPKTouchscreen ControllerComputing/IntelligenceApps ProcessorMemoryAnalog DevicesApps ProcessorApple$10.20$7.20NANDDRAMNAND - Flash 8GB, MLC NANDDRAM – SDRAM 512MBToshibaMicronLPDDR3TechnologyPower ManagementBT/WLAN$5.50$3.00BT/WLAN (Bluetooth and WirelessLAN) IEEES02.11 a/b/g/n, Bluetooth4.0BroadcomUser InterfaceAudio Codec$5.50Audio Codec (for digitizing audiostreams)Audio Power Amplifier Amplifies the soundNFC ControllerМахimNXPNear Field CommunicationsController (for payments, othertransactions)Near Field Communications boosterNFC BoosterSensorsAccelerometer/Gyroscope Accelerometer/Gyroscope – 6 axisOptical Pulse SensorAmbient Light Sensorams AG$3.00ST MicroPhoto sensor for heart rateLight sensor to adjust displaybrightnessLi-Polymer, 3.8V, 205mAh, 0.78WhEnclosure, wristbands, switches,printed circuit boards, misc.Inductive charger and adapter, extrawristband, carrying case, packagingams AGBattery PackOther MechanicalS0.80$16.50Other Box Contents$9.00Assembly Labor$2.50ТОTAL$83.70Adapted from information published through various sources, including the Wall Street Journal (May 1, 2015) andBusiness Wire (April 30, 2015) based on IHS Apple Watch Sport cost chart.

Accepted Answer

The given demand function is,
QAW=-150,000-2,400PAW+1,520PGearS+1,200PPebble-1,200PiPhone6+44A