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Apple outsources production of iPhones, iPads and other electronic devices to Taiwanese contract
manufacturer, Foxconn, with 800,000 workers at factories in Shenzhen, Chengdu, and other
locations in China. Faced with increased competition for labor, Foxconn has raised wages and
increased benefits for its workers. In April 2012, Samsung sued Apple for violating various
Samsung patents to produce mobile phones.
a) Using a suitable diagram, explain how Apple should adjust its production and price if
Foxconn raises its prices for contract manufacturing?
b) Suppose that Apple must pay Samsung a royalty on each mobile device that it produces.
How should Apple adjust its production and price in response to the royalty?
c) How would you change your answer in (b) if Apple must pay a lump sum in damages
rather than a royalty per unit produced?
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