Question

Assume that a firm is building a two-way network that links 20 users. The cost of building the network is $15,000.

3.1 determine the number of potential connection services.

3.2 Assume that each user is willing to pay $200 to connect to the network. Will the firm make profits by building the network?

3.3 Assume that each user is willing to pay $10 for each potential connection, will the firm make profits?

3.4 What would be the number of potential connection services if one user joins the network?

Answer 1

Answer:

a. How many potential connection services does this network provide?

Solution: 380 connection services

Working: A network with 20 users provides 20(20 - 1) = 20*19 = 380 potential connection services

b. If each user is willing to pay $200 to connect to the network, will the firm profit by building the network?

Solution: No

Working: Revenues will be $4000 (=200 * 20) relative to the $15,000 in costs

c. If each user is willing to pay an average of $10 for each potential connection service provided by the network, will the firm profit by building the network?

Solution: Yes

Working: With 380 connection services, each consumer will be paying $3800(i.e: 10*380) to join the network. Because there are 20 consumers thus the total revenues are $76,000, compared to the $15,000 required to build the network

d. What is the increase in the number of potential connection services if one additional user joins the network?

Solution: 40 connection services

Working: With one addition, new connection services will be 21 (21-1) = 21 * 20 = 420 ; Thus increase 420- 380 = 40