Question
We consider a market in which consumers can buy a network good. The utility of a consumer can be written as U = +vnp, where
We consider a market in which consumers can buy a network good. The utility of a consumer can be written as U = +vnp, where p is the price, a random variable for each consumer (with following a uniform distribution over [0,1]), v a positive parameter and n the number of consumers buying the good. 1. If ne is the anticipated number of users at the time of purchase, what is the characteristic (the value of ) of the consumer indifferent between buying or not the good? (1pt) 2. Assuming rational expectations, what is then the demand function when v < 1? (1pt) 3. Taking as given the market price and still assuming that v < 1, what is the equilibrium (that the equilibrium number of consumers)? (1pt) 4. Suppose now that v > 1. What is the shape of the inverse demand function (hint: consider the cases n = 0 and n = 1 closely)? For a given price, what are the possible equilibria? (2pts),
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