Microsoft is developing a new software. The cost of developing this software is 300 million. After it is developed, Microsoft can make the software available to as many customers as it wants at no additional cost. That is, this new software has a fixed cost of 300 million and a variable cost of 0.

a) What is Microsoft's cost function for this software? Does the production of this software have increasing, constant, or decreasing returns to scale?

After some research, Microsoft concluded that the inverse demand function for this software is p(y)=100-5y, where y is the number of licenses sold per month (in millions).

b) Calculate the number of licenses that Microsoft should sell and that price that it should charge for this new software to maximize profits.

c) Calculate Microsoft's profits if it charges the prices you found in (b).

d) Suppose that, after selling all the licenses above, Microsoft can offer more licenses at a discount. Can Microsoft profit from doing so? What would happen if all consumers know that Microsoft will follow this strategy?

e) How would your answers from parts (b) and (c) change if the cost of developing this software was cut to 200 million?

f) How would your answers change if the cost of developing this software was 700 million?

Problem 1. Microsoft is developing a new software. The cost of developing this software is 300 million. After it is developed, Microsoft can make the software available to as many customers as it wants at no additional cost. That is, this new software has a xed cost of 500 million and a variable cost of 0. a) What is Microsoft's cost function for this software? Does the production of this software have increasing, constant, or decreasing returns to scale? After some research, Microsoft concluded that the inverse demand function for this software is p02)=1005y, where y is the number of licenses sold per month (in millions). b) Calculate the number of licenses that Microsoft should sell and that price that it should charge for this new software to maximize prots. c) Calculate Microsoft's profits if it charges the prices you found in (b). d) Suppose that, after selling all the licenses above, Microsoft can offer more licenses at a discount. Can Microsoft prot from doing so? What would happen if all consumers know that Microsoft will follow this strategy? c) How would your answers from parts (b) and (c) change if the cost of developing this software was cut to 200 million? f) How would your answers change if the cost of developing this software was 700