Digital Books, LLC is a company that sells e-books related to career advising an

Question

Digital Books, LLC is a company that sells e-books related to career advising and professional development. Digital Books, LLC earns a yearly positive economic profit of $25,000 if it can sell 10,000 e-books. Each time, a customer buys an e-book it incurs a cost of $0.50 (cost of downloading each e-book). Digital Books, LLC spends each year $100,000 developing new e-books (new topics and new editions). Is the company market- competitive or not? What is the profit-maximizing price of e-books in the short run? What is your prediction of the profit-maximizing price of e-books in the long run? Will the profit-maximizing price of e-books change in the long run? Why? Why not? Should we include fixed costs in formulas of short-run and long-run profit maximization or we can avoid it in both cases? Is $0.50 -VC or MC?

Explanation / Answer

Yes, the company's market is competitive because it focuses on new ideas and new developments according to the changing environment needs like it is indulged in developing new E- books with new topics and new editions.

(A) Profit - maximizing price of E - books in the short run is calculated as follows:-

Profit = (Price - Marginal Cost)* Q

It implies, 25000 = (Price - 0.50) * 10000

2.5 = Price - 0.50

Therefore, Price = 2.5 + 0.5 = $3 (.....short run price)

(B) According to me, profit - maximizing price of E- books in the long run can be:-

We know that in the long - run, profits of any company tend to fall at the final stage after a period of time. Therefore,

Profits = (Price - Marginal Cost) * Q - Fixed Cost

It implies, 0 = (Price - 0.50) * 10000 - 100000

It equals to, 10 = Price - 0.50

Therefore, Price = $10.50 (.....long-run price)

(C) Price in the long - run will change because profits in the long run tend to fall to '0' because of highly competitive market with the entry of new firms and their new ideas.

(D) No, we cannot include fixed costs in the formula of short run profit maximization but we can include fixed cost in the formula of long- run profit maximization.

(E) $0.50 is a marginal cost (MC) to buy an E- book.

Thanks.

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