Question 1: Microsoft sells two types of office software, a word processor it calls Word, and a spreadsheet it calls Excel. Both can be produced at zero marginal cost. There are two types of consumers for these products, who exist in roughly equal proportions in the population: authors, who are willing to pay $120 for Word and $40 for Excel, and economists, who are willing to pay $50 for Word and $150 for Excel. a. Suppose that Microsoft execs decide to sell Word and Excel separately. What price should Microsoft set for Word? (Hint: Is it better to sell only to authors, or to try to sell to both authors and economists?) What price should Microsoft set for Excel? What will Microsoft’s profit be from a representative group of one author and one economist? b. Suppose that Microsoft decides to bundle together Word and Excel in a package called Office, and not offer them individually. What price should Microsoft set for the package? How much profit will Microsoft generate from a representative group of one author and one economist?
Question 1: Microsoft sells two types of office software, a word processor it calls Word, and a spreadsheet it calls Excel. Both can be produced at zero marginal cost. There are two types of consumers for these products, who exist in roughly equal proportions in the population: authors, who are willing to pay $120 for Word and $40 for Excel, and economists, who are willing to pay $50 for Word and
$150 for Excel.
a. Suppose that Microsoft execs decide to sell Word and Excel separately.
What price should Microsoft set for Word? (Hint: Is it better to sell only to authors, or to try to sell to both authors and economists?)
What price should Microsoft set for Excel?
What will Microsoft’s profit be from a representative group of one author and one economist?
b. Suppose that Microsoft decides to bundle together Word and Excel in a package called Office, and not offer them individually.
What price should Microsoft set for the package?
How much profit will Microsoft generate from a representative group of one author and one economist?
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