4. Problems and Applications Q4 Consider the market for mobile applications, smartphones, and conventional phones.
For each pair, identify whether they are complements or substitutes:
Pairs of Goods and Services
Complements
Substitutes
Mobile applications and smartphones

Mobile applications and conventional phones

Smartphones and conventional phones

Suppose a network externality reduces the cost of developing cell phone applications.
Show the effect of this change on the market for cell phone applications.
Demand
Supply
Price of Cell Phone Applications
Quantity of Cell Phone Applications
Demand

S
1

S
2

Next, show the effect the previous change in the market for cell phone applications has on the market for conventional phones.
Demand
Supply
Price of Conventional Phones
Quantity of Conventional Phones
D
1

D
2

Supply

Finally, show the effect the previous change in the market for cell phone applications has on the market for smartphones.
Demand
Supply
Price of Smartphones
Quantity of Smartphones
Demand

Supply