Suppose that fax machines are made available in Never laud. Companies are deckli
ID: 1204395 • Letter: S
Question
Suppose that fax machines are made available in Never laud. Companies are deckling whether to install a fax machine. It costs USD 500 to install the machine. Company's benefits from fax machine depends whether company is focused on national or international markets and also depends on the number of other companies relying on fax machine for communication. The benefit national companies receive from installing fax machine is USD 360+200x while the benefit international companies receive from installing fax machine is USD 450 + 500x, x [0, 1] represents the proportion of companies who use the fax machine for communication. Let p [0, 1] and 1 - p represents the fractions of national and international companies. When companies (national and international) decide to install the fax machine? Analyze the equilibrium adoption of fax machines in Neverland if p = 1? Is there any unstable equilibrium? stable equilibrium? Analyze the equilibrium adoption of fax machines in Neverland if p = 0.6? What happens when p = 0.2?Explanation / Answer
1) Companies will make their decision on the basis of cost and benefitts using marginal analysis. Now observe that the marginal benefit available to national companies for installing fax machine is 200 while it is 500 to international companies. in that case, only international companies will install since tahn it will cover the insatlling cost of $500.
The task is to thus find the value of x for which both types install machine.
360 + 200x = 500 and 450 + 500x = 500
x = 0.7 and x = 0.1
This suggests that for a value of x >0.7, all companies will install machine.
2) When p = 1, all companies are national so the fraction of companies installing fax machine should be greater than 0.7 or at least 70% pf the national companies are installing it.
3) When p = 0.6, there are 60% national and 40% international companies. The situation changes now so that if 70% of these 60% companies or 42% of the total companies are planning to intall the machine, only then the machine will be installe by national companies.
For international companies , if 10% of 40% or 4% of total companies are insatlling the machine, only then the machine will be installe by international companies.
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