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INFORMATION TECHNOLOGY AND ECONOMY ECON 3570 HOMEWORK ASSIGNMENT 1

TIN CHEUK LEUNG

Question 1. Optimal Copyright Length Suppose books last 10 years. Each book has a value of $100 per year under competition, has a value of $60 per year under monopoly (that is there is $40 per year of deadweight loss). Copyright Length Books written length under the regime. 0 100 1 106 2 112 3 118 4 124 5 130 6 136 7 142

Download the excel file and complete the table. Find out the optimal copyright

Question 2. Warranty Problem Consider the monopoly’s warranty problem under symmetric information analyzed in the lecture. The value of a product whose value to the consumer is V if the product is operative, and 0 if the product is defective, where V > 0. The probability for a product to be functional is ρ, where 0 < ρ < 1. But here let’s assume that for some reason the monopoly cannot gurantee more than one product replacement in case the product purchased is found detective. That is, if the product is found detective, the monopoly can provide a warranty to replace the product with a new product; however, if the replacement product fails, then the monopoly cannot replace the replacement product. (a) What is the monopoly’s expected cost if it provides this type of warranty? (b) What is the maximum price the monopoly can charge for the product sold with this type of warranty? (c) Will a monopoly sell the product with a warranty?

Question 3. Network Effects Consider the network effects model we discuss in the lecture. Consumers can choose between two brands of computer, A and B. Each consumer is endowed with Y

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ECON 3570

Homework Assignment 1

dollars to be spent on one unit of hardware and the variety of software written for the specific hardware purchased. Denote pi as the price of brand i. Thus, the expenditure on brand i’s software is Ei ≡ Y − pi . Consumers are uniformly indexed by δ on the interval [0, 1] according to their relative preference towards brand B....