Explain goods with network-externalities using an example.

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Chapter 18, Problem 11Q

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Explain goods with network-externalities using an example.

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Question 10 Which of the following startements about network externalities is CORRECT? Air pollution is an example of a network externality. For a good with network externalities, the number of people who are willing to buy a unit of the good is uniquely determined by the price. Network externalities are always positive. The manufacturer of a new good with network externalities might give away a free version of the good. For a good with network externalities, one person's valuation of the good is always increasing in the number of other people using the good.

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Imagine that you run the toll authority for a city bridge. You must charge all of your customers the exact same toll. Initially, you have set the price at $2 per trip. The following graph shows the daily demand curve for trips across the city bridge. On the following graph, use the purple rectangle (diamond symbols) to shade the area representing the total daily expenditure when the toll is $2 on the graph. Note: Select and drag the rectangles from the palette to the graph. To resize, select one of the points on the rectangle and move to the desired position. Once drawn, select inside the rectangle to see its area. TOLL (Dollars per vehicle) 10 9 8 2 1 0 Demand 01 2 3 4 5 6 7 8 9 QUANTITY (Thousands of vehicles per day) 10 When the toll is $2, total expenditure is $ An advisor has suggested that if you raise the toll to $3, total expenditure on tolls will rise. Total Expenditure at $2 per da Total Expenditure at $3 On the previous graph, use the green rectangle (triangle symbols) to…