Question

what effect does a network externality have on the market for a product? if a network externality is present for a product, then
a. producers may be more likely to supply the product to avoid market failure.
b. producers may be less likely to supply the product because it is less unique.
c. producers may be more likely to supply the product to create path dependence.
d. producers may be less likely to supply the product to avoid switching costs.
e. consumers may be more likely to buy the product because it is more useful.

Explanation:

To solve this, we analyze each option:

• Option A: Network externality doesn't relate to avoiding market failure in this way. Producers' supply isn't driven by avoiding market failure due to network externality. Eliminate A.
• Option B: Network externality makes a product more valuable as more use it, not less unique. So producers being less likely to supply due to less uniqueness is wrong. Eliminate B.
• Option C: Path dependence is about historical choices, not a direct reason for producers to supply due to network externality. Eliminate C.
• Option D: Switching costs are for consumers, not a reason producers avoid supplying. Eliminate D.
• Option E: Network externality means a product's value increases with more users (e.g., social media, software). So consumers find it more useful as more people use it, making them more likely to buy. This matches the concept of network externality.

Answer:

E. consumers may be more likely to buy the product because it is more useful.