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Chapter 4: Problem 14

Vera has decided to upgrade the operating system on her new \(P C .\) She hears that the new Linux operating system is technologically superior to Windows and substantially lower in price. However, when she asks her friends, it turns out they all use PCs with Windows. They agree that Linux is more appealing but add that they see relatively few copies of Linux on sale at local stores. Vera chooses Windows, Can you explain her decision?

Short Answer

Expert verified
Vera chose Windows over Linux due to the high network externality associated with Windows (all her friends use it), which enhances its value for her. Despite Linux's technological superiority and lower price, it lacked in availability and familiar user base, which led to her decision. Therefore, her selection was made by considering overall utility derived rather than just technological superiority and price.

Step by step solution

01

Understanding Network Externalities

Network externality is a situation where the value or utility a user derives from consumption increases with the number of users of the same or compatible product. In Vera's case, all her friends are using Windows, which means that she can have better software compatibility, easier trouble-shooting, and more experiences shared by her friends. Hence, the value of using Windows increases due to its large number of users.
02

Considering Consumer Behavior

Consumer behavior theory states that consumers aim at maximizing their utility given their budget constraints. Even though Linux is technologically superior and cheaper, Vera may not derive maximum utility from it due to reasons such as its low availability at local stores or lack of familiarity among her friends.
03

Explaining Vera's Decision

Vera's decision of choosing Windows over Linux can be explained as her preference for a higher network externality and availability even though it comes at a higher price. Therefore, even if Linux is superior technology-wise, the benefits she gets from using Windows, like the ease of getting help from her friends and the easy availability of the software, outweigh the benefits she would get from the lower price and superior technology of Linux.

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Most popular questions from this chapter

a. Orange juice and apple juice are known to be perfect substitutes. Draw the appropriate priceconsumption curve (for a variable price of orange juice) and income-consumption curve. b. Left shoes and right shoes are perfect complements. Draw the appropriate price-consumption and income-consumption curves.

You run a small business and would like to predict what will happen to the quantity demanded for your product if you raise your price. While you do not know the exact demand curve for your product, you do know that in the first year you charged \(\$ 45\) and sold 1200 units and that in the second year you charged \(\$ 30\) and sold 1800 units. a. If you plan to raise your price by 10 percent, what would be a reasonable estimate of what will happen to quantity demanded in percentage terms? b. If you raise your price by 10 percent, will revenue increase or decrease?

Suppose the income elasticity of demand for food is 0.5 and the price elasticity of demand is \(-1.0 .\) Suppose also that Felicia spends \(\$ 10,000\) a year on food, the price of food is \(\$ 2,\) and that her income is \(\$ 25,000\) a. If a sales tax on food caused the price of food to increase to \(\$ 2.50,\) what would happen to her consumption of food? (Hint: Because a large price change is involved, you should assume that the price elasticity measures an arc elasticity, rather than a point elasticity.) b. Suppose that Felicia gets a tax rebate of \(\$ 2500\) to ease the effect of the sales tax. What would her consumption of food be now? c. Ts she better or worse off when given a rebate equal to the sales tax payments? Draw a graph and explain.

An individual sets aside a certain amount of his income per month to spend on his two hobbies, collecting wine and collecting books. Given the information below, illustrate both the price-consumption curve associated with changes in the price of wine and the demand curve for wine. $$\begin{array}{|ccccc|} \hline \begin{array}{c} \text { PRICE } \\ \text { WINE } \end{array} & \begin{array}{c} \text { PRICE } \\ \text { B00K } \end{array} & \begin{array}{c} \text { QUANTITY } \\ \text { WINE } \end{array} & \begin{array}{c} \text { QUANTITY } \\ \text { BOOK } \end{array} & \text { BUDGET } \\ \hline \$ 10 & \$ 10 & 7 & 8 & \$ 150 \\ \hline \$ 12 & \$ 10 & 5 & 9 & \$ 150 \\ \hline \$ 15 & \$ 10 & 4 & 9 & \$ 150 \\ \hline \$ 20 & \$ 10 & 2 & 11 & \$ 150 \\ \hline \end{array}$$

The director of a theater company in a small college town is considering changing the way he prices tickets. He has hired an economic consulting firm to estimate the demand for tickets. The firm has classified people who go to the theater into two groups and has come up with two demand functions. The demand curves for the general public \(\left(Q_{x p}\right)\) and students \((Q)\) are given below: \\[ \begin{array}{l} Q_{g p}=500-5 P \\ Q_{s}=200-4 P \end{array} \\] a. Graph the two demand curves on one graph, with \(P\) on the vertical axis and \(Q\) on the horizontal axis. If the current price of tickets is \(\$ 35,\) identify the quantity demanded by each group. b. Find the price elasticity of demand for each group at the current price and quantity. c. Is the director maximizing the revenue he collects from ticket sales by charging \(\$ 35\) for each ticket? Explain. d. What price should he charge each group if he wants to maximize revenue collected from ticket sales?
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