Consider the model of software variety determination under a monopoly hardware firm analyzed in Section 3.2. Suppose that the utility function (3.4) is now modified to capture a lower utility from paying the hardware price p. Thus, assume that U def =  αs − γp Buys the computer and entire variety of software 0 Buys none.

(a) Calculate the price charged by the monopoly hardware firm and the resulting equilibrium software variety.

(b) How would an increase in the parameter γ affect the hardware price and the equilibrium variety of software. Explain!