Question 1

For a good with network externalities, the number of people who are willing to buy a unit of the good is uniquely determined by the price.

Accepted Answer

A) True 
 B)False  False

Question 2

If the demand curve for the DoorKnobs operating system is related to perceived market share s and actual market share t by the equation p = 98s(1 - x), then in the long run, the highest price at which DoorKnobs would maintain a market share of   would be

Accepted Answer

A)  $18. 
B)  $15.60. 
C)  $10.80. 
D)  $12. 
E)  $14.40. 
A)  $18. 
B)  $15.60. 
C)  $10.80. 
D)  $12. 
E)  $14.40. D

Question 3

A group of 13 consumers are trying to decide whether to connect to a new communications network. Consumer 1 is of type 1, consumer 2 of type 2, consumer 3 of type 3, and so on. Each consumer's willingness to pay to belong to the network is proportional to the number of consumers who belong. Where k is the number of consumers who belong, the willingness to pay of a type n consumer is equal to k times n. What is the highest price at which 9 consumers could all connect to the network and either make a profit or at least break even?

Accepted Answer

A)  $47 
B)  $50 
C)  $43 
D)  $42 
E)  $45 
A)  $47 
B)  $50 
C)  $43 
D)  $42 
E)  $45 E

Question 4

Professor Kremepuff has published a new textbook. This book will be used in classes for two years, at which time it will be replaced by a new edition. The publisher charges a price of $p1 in the first year and $p2 in the second year. After the first year, bookstores buy back copies from students for $   and resell them to students in the second year for $p2. (Students are indifferent between new and used copies.) The cost to a student in the first year of owning the book for a year is therefore $(p1 -   ). In the first year of publication, the number of students willing to pay $v to own the book for a year is 40,000 - 1,000v. The number of students taking the course in the first year who are willing to pay at least $w to keep the book for reference rather than resell it is 40,000 - 5,000w. In the second year, the number of students who have not previously taken the course and are willing to pay at least $p for a copy of the book is 30,000 - 1,000p. If the publisher sets a price of $p1 in the first year and $p2 in the second year, with p1 B3 p2, then the total number of copies that the publisher sells over two years will be equal to

Accepted Answer

A)  80,000 - 3,000p2. 
B)  80,000 - 1,000(p1 -). 
C)  80,000 - 1,000p1 - 1,000p2. 
D)  70,000 - 1,000(p1 +). 
E)  70,000 - 1,500p2. 
A)  80,000 - 3,000p2. 
B)  80,000 - 1,000(p1 -). 
C)  80,000 - 1,000p1 - 1,000p2. 
D)  70,000 - 1,000(p1 +). 
E)  70,000 - 1,500p2.

Question 5

One proposed remedy for the Microsoft antitrust case is to break Microsoft into three equal parts and strictly prohibit any coordination between the parts. The three mini-Microsoft's would then compete with one another in both the operating system and applications markets. From a Systems Competition perspective, comment on how this proposed settlement might eventually affect consumers.

Accepted Answer

From a Systems Competition perspective,

Question 6

Why might a profit-maximizing firm producing a new product with network externalities want to give its product away for free?

Accepted Answer

A)  To lock customers in then raise prices at a later date. 
B)  Although this practice loses money, it can get the firm valuable publicity. 
C)  By building market share, the product becomes much more valuable and the firm can make money by offering a premium version of the product for sale. 
D)  The product becomes a more valuable place to advertise if it doesn't cost anything. 
E)  A profit-maximizing firm would never give its product away for free. 
A)  To lock customers in then raise prices at a later date. 
B)  Although this practice loses money, it can get the firm valuable publicity. 
C)  By building market share, the product becomes much more valuable and the firm can make money by offering a premium version of the product for sale. 
D)  The product becomes a more valuable place to advertise if it doesn't cost anything. 
E)  A profit-maximizing firm would never give its product away for free.

Question 7

If the probability that a firm is caught making illegal copies of software increases with the number of copies that the firm makes, then the larger the fine assessed for copying, the smaller will be the number of copies made by each software-copying firm.

Accepted Answer

A) True 
 B)False

Question 8

Copyright protection discourages the production of new software.

Accepted Answer

A) True 
 B)False

Question 9

Banks have started offering electronic bill pay for free. This decision can best be explained as

Accepted Answer

A)  matching free services provided by competitor banks to win over new customers. 
B)  increasing switching costs. Customers would have to set up electronic bill pay again at their new bank. 
C)  banks wanting to enhance their reputation for good service. 
D)  banks reducing their costs of paper check processing. 
E)  a fad or novelty. 
A)  matching free services provided by competitor banks to win over new customers. 
B)  increasing switching costs. Customers would have to set up electronic bill pay again at their new bank. 
C)  banks wanting to enhance their reputation for good service. 
D)  banks reducing their costs of paper check processing. 
E)  a fad or novelty.

Question 10

Professor Kremepuff has published a new textbook. This book will be used in classes for two years, at which time it will be replaced by a new edition. The publisher charges a price of $p1 in the first year and $p2 in the second year. After the first year, bookstores buy back copies from students for $   and resell them to students in the second year for $p2. (Students are indifferent between new and used copies.) The cost to a student in the first year of owning the book for a year is therefore $(p1 -   ). In the first year of publication, the number of students willing to pay $v to own the book for a year is 70,000 - 1,000v. The number of students taking the course in the first year who are willing to pay at least $w to keep the book for reference rather than resell it is 70,000 - 5,000w. In the second year, the number of students who have not previously taken the course and are willing to pay at least $p for a copy of the book is 60,000 - 1,000p. If the publisher sets a price of $p1 in the first year and $p2 in the second year, with p1 B3 p2, then the total number of copies that the publisher sells over two years will be equal to

Accepted Answer

A)  130,000 - 1,000(p1 +). 
B)  140,000 - 1,000(p1 -). 
C)  140,000 - 1,000p1 - 1,000p2. 
D)  140,000 - 3,000p2. 
E)  130,000 - 1,500p2. 
A)  130,000 - 1,000(p1 +). 
B)  140,000 - 1,000(p1 -). 
C)  140,000 - 1,000p1 - 1,000p2. 
D)  140,000 - 3,000p2. 
E)  130,000 - 1,500p2.

Question 11

Video marketers and publishers are more likely to profit from allowing rentals of their products, the higher the ratio of cost of production of originals to the transaction cost of rentals.

Accepted Answer

A) True 
 B)False

Question 12

Systems competition reasoning would suggest that when setting prices of its operating systems, Microsoft need not consider the profitability of PC manufacturers who purchase Microsoft Windows to install on their PCs.

Accepted Answer

A) True 
 B)False

Question 13

Intel produces the overwhelming majority of computer central processing units (CPUs) that run the Microsoft Windows operating system. Systems competition reasoning would suggest that Intel could only benefit from an outcome of the Microsoft antitrust case that is unfavorable to Microsoft.

Accepted Answer

A) True 
 B)False

Question 14

A group of 9 consumers are trying to decide whether to connect to a new communications network. Consumer 1 is of type 1, consumer 2 of type 2, consumer 3 of type 3, and so on. Each consumer's willingness to pay to belong to the network is proportional to the number of consumers who belong. Where k is the number of consumers who belong, the willingness to pay of a type n consumer is equal to k times n. What is the highest price at which 7 consumers could all connect to the network and either make a profit or at least break even?

Accepted Answer

A)  $23 
B)  $26 
C)  $18 
D)  $19 
E)  $21 
A)  $23 
B)  $26 
C)  $18 
D)  $19 
E)  $21

Question 15

If the demand curve for the DoorKnobs operating system is related to perceived market share s and actual market share t by the equation p = 144s(1 - x), then in the long run, the highest price at which DoorKnobs would maintain a market share of   would be

Accepted Answer

A)  $48. 
B)  $41.60. 
C)  $32. 
D)  $28.80. 
E)  $38.40. 
A)  $48. 
B)  $41.60. 
C)  $32. 
D)  $28.80. 
E)  $38.40.

Question 16

Professor Kremepuff has published a new textbook. This book will be used in classes for two years, at which time it will be replaced by a new edition. The publisher charges a price of $p1 in the first year and $p2 in the second year. After the first year, bookstores buy back copies from students for $   and resell them to students in the second year for $p2. (Students are indifferent between new and used copies.) The cost to a student in the first year of owning the book for a year is therefore $(p1 -   ). In the first year of publication, the number of students willing to pay $v to own the book for a year is 60,000 - 1,000v. The number of students taking the course in the first year who are willing to pay at least $w to keep the book for reference rather than resell it is 60,000 - 5,000w. In the second year, the number of students who have not previously taken the course and are willing to pay at least $p for a copy of the book is 50,000 - 1,000p. If the publisher sets a price of $p1 in the first year and $p2 in the second year, with p1 B3 p2, then the total number of copies that the publisher sells over two years will be equal to

Accepted Answer

A)  110,000 - 1,000(p1 +). 
B)  120,000 - 1,000(p1 -). 
C)  120,000 - 3,000p2. 
D)  120,000 - 1,000p1 - 1,000p2. 
E)  110,000 - 1,500p2. 
A)  110,000 - 1,000(p1 +). 
B)  120,000 - 1,000(p1 -). 
C)  120,000 - 3,000p2. 
D)  120,000 - 1,000p1 - 1,000p2. 
E)  110,000 - 1,500p2.

Question 17

A group of 9 consumers are trying to decide whether to connect to a new communications network. Consumer 1 is of type 1, consumer 2 of type 2, consumer 3 of type 3, and so on. Each consumer's willingness to pay to belong to the network is proportional to the number of consumers who belong. Where k is the number of consumers who belong, the willingness to pay of a type n consumer is equal to k times n. What is the highest price at which 7 consumers could all connect to the network and either make a profit or at least break even?

Accepted Answer

A)  $23 
B)  $19 
C)  $18 
D)  $26 
E)  $21 
A)  $23 
B)  $19 
C)  $18 
D)  $26 
E)  $21

Question 18

For a good with network externalities, draw a diagram showing the relation between the number of units sold and the willingness to pay of demanders. Find a price at which there are two stable and one unstable equilibrium quantities. Label these equilibria and explain why the unstable equilibrium is unstable.

Accepted Answer

Supply is horizontal at marginal cost. D

Question 19

Given the many components of a personal computer that are perfect complements, which of the following factors would NOT contribute to increased profit for Microsoft as a supplier of operating systems?

Accepted Answer

A)  A single corporation (Intel) controls the overwhelming majority of the market for CPU chips. 
B)  Hardware has largely become a commodity. 
C)  The market for DRAM memory chips is highly competitive. 
D)  Microsoft Office is frequently bundled with PCs. 
E)  More than one of the above answers is correct. 
A)  A single corporation (Intel) controls the overwhelming majority of the market for CPU chips. 
B)  Hardware has largely become a commodity. 
C)  The market for DRAM memory chips is highly competitive. 
D)  Microsoft Office is frequently bundled with PCs. 
E)  More than one of the above answers is correct.

Question 20

Network externalities are a special kind of externality in which people care about the number of other people who consume the good.

Accepted Answer

A) True 
 B)False

Exam 34: Information Technology

For a good with network externalities, the number of people who are willing to buy a unit of the good is uniquely determined by the price.

If the demand curve for the DoorKnobs operating system is related to perceived market share s and actual market share t by the equation p = 98s(1 - x), then in the long run, the highest price at which DoorKnobs would maintain a market share of would be

Why might a profit-maximizing firm producing a new product with network externalities want to give its product away for free?

If the probability that a firm is caught making illegal copies of software increases with the number of copies that the firm makes, then the larger the fine assessed for copying, the smaller will be the number of copies made by each software-copying firm.

Copyright protection discourages the production of new software.

Banks have started offering electronic bill pay for free. This decision can best be explained as

Video marketers and publishers are more likely to profit from allowing rentals of their products, the higher the ratio of cost of production of originals to the transaction cost of rentals.

Systems competition reasoning would suggest that when setting prices of its operating systems, Microsoft need not consider the profitability of PC manufacturers who purchase Microsoft Windows to install on their PCs.

Intel produces the overwhelming majority of computer central processing units (CPUs) that run the Microsoft Windows operating system. Systems competition reasoning would suggest that Intel could only benefit from an outcome of the Microsoft antitrust case that is unfavorable to Microsoft.

If the demand curve for the DoorKnobs operating system is related to perceived market share s and actual market share t by the equation p = 144s(1 - x), then in the long run, the highest price at which DoorKnobs would maintain a market share of would be

Given the many components of a personal computer that are perfect complements, which of the following factors would NOT contribute to increased profit for Microsoft as a supplier of operating systems?

Network externalities are a special kind of externality in which people care about the number of other people who consume the good.

Budget Constraint

A: Budget Constraint

Preferences

A: Preferences

Utility

A: Utility

Choice

A: Choice

Demand

A: Demand

Revealed Preference

A: Revealed Preference

Slutsky Equation

A: Slutsky Equation

Buying and Selling

A: Buying and Selling

Intertemporal Choice

A: Intertemporal Choice

Asset Markets

A: Asset Markets

Uncertainty

A: Uncertainty

Risky Assets

A: Risky Assets

Consumers Surplus

A: Consumers Surplus

Market Demand

A: Market Demand

Equilibrium

A: Equilibrium

Auctions

A: Auctions

Technology

A: Technology

Profit Maximization

A: Profit Maximization

Cost Minimization

A: Cost Minimization

Cost Curves

A: Cost Curves

Firm Supply

A: Firm Supply

Industry Supply

A: Industry Supply

Monopoly

A: Monopoly

Monopoly Behavior

A: Monopoly Behavior

Factor Markets

A: Factor Markets

Oligopoly

A: Oligopoly

Game Theory

A: Game Theory

Game Applications

A: Game Applications

Behavioral Economics

Exchange

A: Exchange

Production

A: Production

Welfare

A: Welfare

Externalities

A: Externalities

A: Information Technology

Public Goods