You are the author of a new novel. You have the option to either publish the nov

Question

You are the author of a new novel. You have the option to either publish the novel yourself or through a publisher. The publisher is offering you $20,000 for signing the contract. If the novel is successful, it will sell 200,000 copies. Else, it will sell 10,000 copies only. The publisher pays a $1 royalty per copy. A market survey indicates that there is a 70% chance that the novel will be successful. If you undertake publishing, you will incur an initial cost of $90,000 for printing and marketing, but each copy sold will net you $2. Suppose that a literary agent advises you that when a novel is successful, the survey will predict the wrong outcome 20% of the time. When the novel is not successful, the survey will give the correct prediction 85% of the time. Based on the given information, would you accept the publisher's offer or publish the novel yourself?

Explanation / Answer

Expected amount earned from publisher = 20000+0.7*0.8*200000+0.3*0.7*10000 = 134100

Expected amount from self publishing: -90000+2*0.7*0.8*200000+0.3*0.7*20000 = 138200

Therefore, the author should go for self publishing

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