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Unformatted text preview: Chapter 35 NAME Information Technology Introduction. We all recognize that information technology has revolu- tionized the way we produce and consume. Some think that it is necessary to have a new economics to understand this New Economy. We think not. The economic tools that you have learned in this course can offer very powerful insights into the economics of information technology, as we illustrate in this set of problems. 35.1 (2) Bill Barriers, the president of MightySoft software company is about to introduce a new computer operating system called DoorKnobs. Because it is easier to swap files with people who have the same operating system, the amount people are willing to pay to have DoorKnobs on their computers is greater the larger they believe DoorKnobss market share to be. The perceived market share for DoorKnobs is the fraction of all com- puters that the public believes is using DoorKnobs. When the price of DoorKnobs is p , then its actual market share is the fraction of all com- puter owners that would be willing to pay at least $ p to have DoorKnobs installed on their computers. Market researchers have discovered that if DoorKnobss perceived market share is s and the price of DoorKnobs is $ p , then its actual market share will be x , where x is related to the price p and perceived market share s by the formula p = 256 s (1 x ) . (1) In the short run, MightySoft can inuence the perceived market share of DoorKnobs by publicity, advertising, giving liquor and gifts to friendly journalists, and giving away copies in conspicuous ways. In the long run, the truth will emerge, and DoorKnobss perceived market share s must equal its actual market share x . (a) If the perceived market share is s , then the demand curve for Door- Knobs is given by Equation 1. On the graph below, draw the demand curve relating price to actual market share in the case in which Door- Knobss perceived market share is s = 1 / 2. Label this curve s = 1 / 2. (b) On the demand curve that you just drew with s = 1 / 2, mark a red dot on the point at which the actual market share of DoorKnobs is 1/2. (This is the point on the demand curve directly above x = 1 / 2.) What is the price at which half of the computer owners actually want to buy DoorKnobs, given that everybody believes that half of all computer owners want to buy DoorKnobs? $64 432 INFORMATION TECHNOLOGY (Ch. 35) (c) On the same graph, draw and label a separate demand curve for the case where DoorKnobss perceived market share s takes on each of the following values: s =1/8, 1/4, 3/4, 7/8, 1. 2 4 6 8 10 12 14 16 32 64 96 128 160 192 224 256 Actual Market Share (in sixteenths) Willingness to Pay S=1/8 S=1/4 S=1/2 S=3/4 S=7/8 S=1 (d) On the demand curve for a perceived market share of s = 1 / 4, put a red dot on the point at which the actual market share of DoorKnobs is 1/4. (This is the point on this demand curve directly above x = 1 / 4.) If the perceived market share of DoorKnobs is 1/4, at what price is the...
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