Microsoft charges a price of \$599 for a copy of Windows 7. Is this pricing decision rational from a microeconomic perspective?

• A. No, because rational pricing must always match competitors' prices.
• B. Yes, if the price maximizes Microsoft's profit given consumer demand and production costs.
• C. Yes, if the price is lower than the cost of production.
• D. No, because any price above \$100 is always irrational for software.

Answer: (B)

Verified step by step guidance

1. Understand the concept of rational pricing in microeconomics: A price is considered rational if it maximizes the firm's profit, which depends on consumer demand and production costs.
2. Recall that profit maximization occurs where marginal revenue (MR) equals marginal cost (MC). This means the firm sets a price where the additional revenue from selling one more unit equals the additional cost of producing it.
3. Recognize that matching competitors' prices is not a strict requirement for rational pricing; firms can set different prices based on their cost structures and demand conditions.
4. Note that pricing below production cost leads to losses, so a price lower than cost is generally not rational unless for strategic reasons like loss leaders, which is not indicated here.
5. Conclude that the rationality of the \$599 price depends on whether it maximizes Microsoft's profit given the demand for Windows 7 and its production costs, not on arbitrary price thresholds or competitor prices.