stion-4 Consider the following highly simplified picture of the personal computer industry. A monopolist (call it "OEM") supplying a large number of price-taking consumers. The firm must buy three inputs for each computer system that it sells: (1) a variety of components that are themselves supplied competitively and collectively cost the computer OEM $4 per computer; (2) the Windows operating system, available only from Microsoft, at a price pM, and (3) a Pentium microprocessor, available only from Intel, at a price a pI. Since each computer system requires precisely one operating system and one microprocessor, the marginal cost of a computer to an OEM is 4+pM+pI. Let p denote the price the OEM monopolist charges consumers EC335-Fall (Assignment # 1) Page 2 of 3 for a computer system. The demand for computer systems is given by Q=4566p. Microsoft is the sole supplier of the Windows operating system for personal computers. The marginal cost to Microsoft of providing Windows for one more computer is $1. Intel is the sole supplier of the Pentium microprocessors for personal computers. The marginal cost to Intel of a Pentium microprocessor for one more computer system is $2. (a) Suppose that Microsoft and Intel simultaneously and independently set the prices for Windows and Pentium chips, pM and pI. What are the prices, pM and pI ? (b) What is the final price the consumers pay (c) What is the quantity demanded (d) what are the profits of the OEM, Microsoft, and Intel (e) Now suppose that Microsoft and Intel sit down and form a joint venture with an agreement to sell Windows and Pentium chips as a package to computer OEMs for a package price of pJV. What package price would maximize Microsoft's and Intel's combined profits? By how much would an agreement between Microsoft and Intel boost their combined profits? What are the profits accrued by the OEM (f) Would final consumers benefit from such an agreement between Microsoft and Intel, or would they be harmed? What about computer OEMs? Relate your answer to your calculations in parts (a) and (b), and explain the economic principles underlying your answer stion-4 Consider the following highly simplified picture of the personal computer industry. A monopolist (call it "OEM") supplying a large number of price-taking consumers. The firm must buy three inputs for each computer system that it sells: (1) a variety of components that are themselves supplied competitively and collectively cost the computer OEM $4 per computer; (2) the Windows operating system, available only from Microsoft, at a price pM, and (3) a Pentium microprocessor, available only from Intel, at a price a pI. Since each computer system requires precisely one operating system and one microprocessor, the marginal cost of a computer to an OEM is 4+pM+pI. Let p denote the price the OEM monopolist charges consumers EC335-Fall (Assignment # 1) Page 2 of 3 for a computer system. The demand for computer systems is given by Q=4566p. Microsoft is the sole supplier of the Windows operating system for personal computers. The marginal cost to Microsoft of providing Windows for one more computer is $1. Intel is the sole supplier of the Pentium microprocessors for personal computers. The marginal cost to Intel of a Pentium microprocessor for one more computer system is $2. (a) Suppose that Microsoft and Intel simultaneously and independently set the prices for Windows and Pentium chips, pM and pI. What are the prices, pM and pI ? (b) What is the final price the consumers pay (c) What is the quantity demanded (d) what are the profits of the OEM, Microsoft, and Intel (e) Now suppose that Microsoft and Intel sit down and form a joint venture with an agreement to sell Windows and Pentium chips as a package to computer OEMs for a package price of pJV. What package price would maximize Microsoft's and Intel's combined profits? By how much would an agreement between Microsoft and Intel boost their combined profits? What are the profits accrued by the OEM (f) Would final consumers benefit from such an agreement between Microsoft and Intel, or would they be harmed? What about computer OEMs? Relate your answer to your calculations in parts (a) and (b), and explain the economic principles underlying your
