Question

3. (1 point) Suppose a firm faces potential demand from two customer bases, H and L, with high and low valuation of the firm’s product, respectively. If the product has network externalities and all type H customers are currently purchasing the product, then the price that can be charged to L consumers ________. a. increases with the number of H consumers b. decreases with the number of H consumers c. is independent of the number of H consumers d. cannot be determined because the price charged to H is not known

Answer 1

Answer: A. increases with the number of H consumers.

Explanation: If all type H customers are currently purchasing the product, it means that its customer base is large and significant enough and as such the firm would prefer to sell all of its product to H, and also do to the fact that there is only so much supply that a firm can provide. But, fewer quantities of goods would remain for L if more and more goods are sold to H. Due to this lower quantity supplied to the L customer base, it then means that the firm can set the price higher for L. This is because at a higher price, quantity demanded reduces (which is expected for L) and it can therefore maintain supply to H which has more customers.