When you get to the $850 iPhone with 64GB of memory, the profit margin is generally around 75%.
As in, it costs them $215 to make a $850 device.
Apple rarely dips below 40% margin on it's products it seems.
Now that Apple has over $100,000,000,000.00 in it's little hedge fund and has become the largest fund in the world (iirc), I've begun to look at the iPhone as the worlds most successful hedge fund capital raising scheme.
Apple is positioning itself as the luxury brand you can afford.
"Bahnhofstrasse is Zurich's main downtown street and one of the world's most expensive and exclusive shopping avenues. In 2011, a study named the Bahnhofstrasse the most expensive street for retail property in Europe, and the third most expensive worldwide.[1]"
It very much looks as if they are positioning themselves along those super luxury brands.
Chanel perfume can be bought for $100; a Chanel suit for $2000.
A new Ferrari will cost $300,000; a Ferrari T-shirt is $75.
An $850 iPhone fits nicely into this, especially as it it has a similar level of design quality.
Pricing it low would have the effect of short term financial gain but at the expense of commoditising the iPhone's brand. Which would make people far less willing to spend the extra money on the 5S (which has the larger margins).