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 companies should never charge more than their competitors.
• B. No, because any price above \$100 is always irrational regardless of consumer demand.
• C. Yes, because setting a high price always increases total sales.
• D. Yes, if Microsoft believes that consumers are willing to pay \$599, the price serves as an incentive for profit maximization.

Answer: (D)

Verified step by step guidance

1. Step 1: Understand the principle that people respond to incentives, which means that consumers and firms make decisions based on the costs and benefits they perceive.
2. Step 2: Recognize that a firm's pricing decision is rational if it aims to maximize profit by setting a price where the quantity demanded by consumers matches the firm's profit goals.
3. Step 3: Analyze Microsoft's pricing of \$599 for Windows 7 as a strategic decision based on their belief about consumer willingness to pay that price.
4. Step 4: Consider that if consumers are willing to pay \$599, this price acts as an incentive for Microsoft to supply the product, as it covers costs and generates profit.
5. Step 5: Conclude that the pricing decision is rational under the incentive principle because it aligns with profit maximization given consumer demand, rather than arbitrary rules about competitor prices or fixed price thresholds.