A publisher faces the following demand schedule for the next novel of one of its

Question

A publisher faces the following demand schedule for the next novel of one of its popular authors: The author is paid dollar 2 million to write the book, and the marginal cost of publishing the book, is a constant dollar10 per book. Compute total revenue, total cost and profit at each quantity. What quantity would a profit-maximizing publisher choose? What price would it charge? Compute marginal revenue. (Recall ;hat MR = delta T R / delta O) ATR/AO) If the author were paid dollar 3 million instead of dollar 2 million to write the book, how would this affect the publisher's decision regarding the price to charge? Explain. Suppose the publisher was not profit- maximizing but was concerned with maximizing economic efficiency. What price would it charge for the book? How much profit would it make at this price?

Explanation / Answer

The problem is related with a book publisher. He has different demanded quantity at different price. If price per book is high then number of books sold will be low. So by multiplying price per book and quantity demanded by customers you can get total revenue.

Now consider total cost. Publisher has to pay 20 million dollar as Royalty. It is fixed cost. Add with it publishing cost to get total cost. Here publishig cost is total variable cost. Deduct total cost from total revenue to get total profit. Entire calculation is shown in the table below:

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Answer (b): Marginal revenue is change in total revenue divided by the change in total quantity It is shown below:

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Answer (c):

If royalty is going up from $2 million to $3 million, then total cost will increase. It will not change profit maximizing price of book although total profit will change. It is due to the fact that variable cost is not changing. Thus marginal cost is same as it was earlier. Result is shown in the table below:

Answer: No change in profit maximizing price.

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Answer (d):

Finally consider the situation when firm instead of maximizing profit is trying to maximize economic effeciency. It will occur when average cost of publishing book is minimized. It is shown below:

Note that AC is continuously falling. So for maximizing economic effeciency price will be zero. Profit will be zero.

Statement showing total cost, total revenue and total profit Price Demand Royalty Publishing cost Total cost Total Revenue Profit (P) (Q) (Fixed cost) (Variable cost) (TC) (TR=PQ) (TR-TC) $100 0 $2,000,000 $0 $2,000,000 $0.00 -$2,000,000 $90 100,000 $2,000,000 $1,000,000 $3,000,000 $9,000,000.00 $6,000,000 $80 200,000 $2,000,000 $2,000,000 $4,000,000 $16,000,000.00 $12,000,000 $70 300,000 $2,000,000 $3,000,000 $5,000,000 $21,000,000.00 $16,000,000 $60 400,000 $2,000,000 $4,000,000 $6,000,000 $24,000,000.00 $18,000,000 $50 500,000 $2,000,000 $5,000,000 $7,000,000 $25,000,000.00 $18,000,000 $40 600,000 $2,000,000 $6,000,000 $8,000,000 $24,000,000.00 $16,000,000 $30 700,000 $2,000,000 $7,000,000 $9,000,000 $21,000,000.00 $12,000,000 $20 800,000 $2,000,000 $8,000,000 $10,000,000 $16,000,000.00 $6,000,000 $10 900,000 $2,000,000 $9,000,000 $11,000,000 $9,000,000.00 -$2,000,000 $0 1,000,000 $2,000,000 $10,000,000 $12,000,000 $0.00 -$12,000,000

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