Homework #7 Solutions

Homework #7 Solutions - Introduction to Microeconomics ECON...

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Unformatted text preview: Introduction to Microeconomics ECON 110 HW 7 - KEY Due 4/20 Professor Rolleigh Notes: Show all work for full credit. You must type your answers. All equations and algebra work may be written by hand. Unless otherwise spec- ified in the question, graphs may be drawn by hand. Graphs do not need to be drawn to scale. Fully label diagrams for full credit. Answers should be as brief as possible. Unless otherwise noted, you may assume markets are competitive and exhibit no externalities. Question 1(15 points) Comment on the government’s case against Microsoft. Why was it justi- fied. Why was it not justified? You should consult the reading packet for information on this. You are also welcome to consult Wikipedia. Answer to question 1 You could really answer this question in number of different ways. Given that it was worth 15 points, I expected somewhat thorough answers. I would answer as follows: The government case against Microsoft had several components. The first dealt with tying, the practice of bundling products together. Microsoft included Internet Explorer with its operating system, a practice that com- petitors felt was unfair. This portion of the case had little to no merit. Economic theory tells us that tying is probably not harmful to consumers, as you will not be able to charge more for the two products combined than the sum of their individual valuations. What is more, Microsoft was giving their browser away for free. This is the opposite of what harms consumers. There are many types of tying that are accepted and even expected in the market today. You purchase a car with tires, but no one complains about that. With the benefit of hindsight, this tying almost certainly did not harm 1 consumers. There are at least three viable alternatives to Internet Explorer today, and they are all free. If Netscape had succeeded in stopping the tying, we might be paying $30 for browsers today (that is what Netscape tried to charge in the 90’s). The second part of the case, that Microsoft was using its market power to force vendors to include a copy of Windows with every PC purchased has more merit. Dell was unable to sell computers without a copy of Windows....
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Homework #7 Solutions - Introduction to Microeconomics ECON...

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