Microsoft charges a price of \$599 for a copy of Windows 7. Is this pricing decision rational according to the principle that people respond to incentives?

• A. No, because rational pricing decisions do not consider consumer incentives.
• B. Yes, but only if the price is set below the cost of production.
• C. Yes, if Microsoft believes that consumers are willing to pay \$599, the price serves as an incentive for profit maximization.
• D. No, because any price above \$100 is always irrational regardless of consumer demand.

Answer: (C)

Verified step by step guidance

1. Step 1: Understand the principle that people respond to incentives. In microeconomics, this means that consumers and producers make decisions based on the costs and benefits they face, including prices.
2. Step 2: Analyze Microsoft's pricing decision. Microsoft sets the price of Windows 7 at \$599, which reflects their expectation of consumer willingness to pay and the potential for profit.
3. Step 3: Consider the role of incentives in pricing. A price acts as an incentive by signaling the value of the product to consumers and influencing their purchasing decisions.
4. Step 4: Evaluate rationality in pricing. A pricing decision is rational if it aligns with maximizing profit, which occurs when the price is set at a level consumers are willing to pay and that covers costs.
5. Step 5: Conclude that Microsoft's pricing is rational if they believe consumers value Windows 7 at \$599, as this price incentivizes profit maximization by balancing consumer willingness to pay and production costs.