Question: A friend of yours is considering developing a new software. The cost of developing this software is 5, 000. After it is developed, the software

A friend of yours is considering developing a new software. The cost of developing this software is 5, 000. After it is developed, the software can be made available to as many customers as your friend wishes at zero additional cost. The inverse demand function for this software is p(q) = 200 q, where q is the quantity demanded.

(a) What is the fixed cost of this software? What is the variable cost?

(b) Does this software have decreasing, constant, or increasing returns to scale? Justify.

(c) Suppose that, after developing this software, your friend will become a monopolist. Find the price that your friend should charge for the software and the profit your friend will make.

(d) Now, suppose that after your friend develops the software, firms can freely enter the market and produce this app at zero fixed and marginal cost. What would the equilibrium price and quantity be if this market becomes perfectly competitive?

(e) Would you recommend that your friend develops this software if you expect firms to be able to freely enter? Justify.

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