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

Question

You 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

Marginal analysis involves a cost-versus-benefits comparison of various business activities. In marginal analysis, the cost of an activity is measured against incremental changes in volume to determine how the overall change in cost will affect the bottom line of a business. Marginal analysis can show the cost of additional production by a business all the way up to the break-even point. This is generally the maximum cost that a business can sustain without losing money.

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