Question
A publisher faces the following demand schedule for the next novel from one of its popular authors: Price Quantity Demanded $100 0 novels 90 100,000
A publisher faces the following demand schedule for the next novel from one of its popular authors:
Price Quantity Demanded
$100 0 novels
90 100,000
80 200,000
70 300,000
60 400,000
50 500,000
40 600,000
30 700,000
20 800,000
10 900,000
0 1,000,000
The author is paid$2million to write the book, and the marginal cost of publishing the book is a constant$1per book.
a. Compute total revenue, total cost, and profit at each quantity. What quantity would a profit-maximizing publisher choose? What price would it charge?
b. Compute marginal revenue. (Recall that MR = ^TR / ^Q.) How does marginal revenue compare to the price? Explain.
c. Graph the marginal-revenue, marginal-cost, and demand curves. At what quantity do the marginal-revenue and marginal-cost curves cross? What does this signify?
d. In your graph, shade in the deadweight loss. Explain in words what this means.
e. If the author were paid$3million instead of$2million to write the book, how would this affect the publisher's decision regarding what price to charge? Explain.
f. Suppose the publisher was not profit-maximizing but was instead concerned with maximizing economic efficiency. What price would it charge for the book? How much profit would it make at this price?
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