ou are hired by Oakland University Bookstore (OUB) to determine the demand for a

Question

ou are hired by Oakland University Bookstore (OUB) to determine the demand for a new book entitled: "How to Get Good Grades Without Really Studying" (see opportunity cost of space problem in ch. 6). Based on your analysis, you determine that the demand for this book is represented approximately by the function:

Q1 = a - bP,

where P is the price per copy, and Q1 is the anticipated quantity demanded.

OUB obtains this book at a price of $x per copy, and seeks to carry as many titles as would allow it to maximize profit, given that it is guaranteed a profit margin of $y per book on these other titles it carries.

i. Advise OUB as to how many copies of "How to Get Good Grades" it should order.

ii. Unbeknownst to you, four other area bookstores were also making a similar decision to carry "How to Get Good Grades"; as a result, OUB's market share is only 10%; i.e. OUB's demand for "HTGGG" falls to Q1 = h - jP. However, having already placed its order according to your recommendation in i) above, OUB asks you for loss minimizing price recommendation. Advise OUB on the best price to charge when

a) the publisher offers a full refund on unsold copies.

b) the book's publisher has a no return policy.

Explanation / Answer

In the financial system funds flow from those who have surplus funds to those who have a shortage of funds, either by direct, market-based financing or by indirect, bank-based finance. The former British Prime Minister William Gladstone expressed the importance of finance for the economy in 1858 as follows: "Finance is, as it were, the stomach of the country, from which all the other organs take their tone."

The financial system comprises all financial markets, instruments and institutions. Today I would like to address the issue of whether the design of the financial system matters for economic growth. My view is that the answer to this question is yes. According to cross-country comparisons, individual country studies as well as industry and firm level analyses, a positive link exists between the sophistication of the financial system and economic growth. While some gaps remain, I would say that the financial system is vitally linked to economic performance. Nevertheless, economists still hold conflicting views regarding the underlying mechanisms that explain the positive relation between the degree of development of the financial system and economic development.

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