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Marginal Analysis Assignment

Textbook publishing is a lucrative business. Marvin Publishing's bestselling account is for graduate economics textbooks. The product's price is determined by the market (demand and supply).The current market price is taken by Marvin as $50 per book. The production cost is given as:

Total cost = 350 - 10Q + 2Q where Q is the volume of output in thousands (000).

Marginal cost = -10 + 4Q andMarginal Revenue = Price = $50

1.Whatvolume of outputshould Marvin produce to maximize profit and what will theprofitbe at this level of output?

1. Profit maximization occurs at the output level where marginal revenue equals marginal cost, or where marginal profit equals zero.

In calculating the profit-maximizing quantity, we know that profit is maximized at the output level where MR = MC.

Marvin's production

Marginal cost = -10 + 4Q

Marginal Revenue = Price = $50

-10 + 4Q= 50

+10 -10 + 4Q=50+10

4Q = 60

4Q/4=60/4

Q=15 units where Q is thevolume of output in thousands (000)

Q= 15,000 profit-maximizing quantity

2.A rival publisher has reduced the price of its best-selling economics text by $15 and is selling the textbooks for $30. Marvin is considering the option of exactly matching this price reduction and so preserve his level of sales. Do you endorse this price decrease? (Briefly explain quantitatively why or why not.)

1. Total cost = 350 - 10Q + 2Q where Q is the volume of output in thousands (000)

Marginal cost = -10 + 4Q

Marginal Revenue = Price = $50

Profit-Maximizing Quantity = 15,000

Calculating the Maximum Profit

Profit=TRTC

Profit=PQTC

Profit =50*Q-(350 - 10Q + 2Q)

Profit = (50)(15000)(350(10)(15000)+(2)(15000))

Profit = 750000-(350-150000+30000)

Profit = 750000-(-119650)

Profit = 750000+119650

Profit = 869,650 Maximum Profit

1. Equilibrium condition MR = MC

As the economic advisor to Marvin Publishing, I would endorse a price decrease.A graduate student finding two books in direct competition, she would purchase the least expensive.Most likely both publishing companies were earning a positive profit at the going market price. Thus the rival publisher saw an opportunity to drop the price and still be able to earn an economic profit.Considering the competition and homogeneous goods, with if the rival succeeds in gaining greater profit by cutting prices, Marvin Publishing will have no choice but to follow or exit the market.Buyers in perfect competition will only be willing to purchase the good from the seller who has the lowest price. Since the price has been lowered, all publishers will have a lower economic profit than they had collectively before they lowered the price.With the lowered price Marvin would still make a provide.It is not the maximum provide, however the provide exceed the total cost.

$50

Total Revenue = Pricex Quantity

TR = $50 * 15000

TR = 750000

Profit = Total Revenue - Total Cost

Profit = 750000-(350 - 10Q + 2Q)

Profit = 750000-(350(10)(15000)+(2)(15000))

Profit = 750000-(350-150000+30000)

Profit = 750000-(-119650)

Profit = 750000+119650

Profit = 869,650 Maximum Profit

$30

Total Revenue = Pricex Quantity

TR = $30 * 15000

TR = 450000

Profit = 450000 - (350 - 10Q + 2Q)

Profit = 450000 -(350-150000+30000)

Profit = 450000-(-119650)

Profit = 569,650

Total Cost = Fixed cost+ Variable Cost

TC = 350 - 10Q + 2Q

TC = (350(10)(15000)+(2)(15000))

TC = 350-150000+30000-10 + 60000

TC = -119650

Marginal Cost =

Marginal cost = -10 + 4Q

MC = -10 + 4(15000)

MC = -10+60000

MC = 59990

3.To save significantly on fixed costs, Marvin Publishing plans to contract out the actual printing of its textbooks to outside vendors. The firm now expects to pay a somewhat higher printing cost per book (than is described above) from the outside vendor (who marks up the price above its cost to make a profit). How would outsourcing affect the above output and pricing decisions?

1. Marginal cost (MC) is the change in total cost associated with a single unit change in output.By outsourcing the printing, Marvin Publishing will pay more to produce each book due to the increased printing price per book.While the fixed cost overall will remain unchanged the cost per book will increase.Thus, the variable cost would increase which will increase the total cost.

This would impact my decision and recommendation due to the fact that the marginal cost is rising with each single unit. The marginal cost provides insight to my recommendation to inform Marvin Publishing on how profits would be affected by increasing or decreasing production.In a short-run Marvin's total costs fixed costs (production costs before producing any output) and variable costs (costs incurred in producing the book). The fixed costs are sunk costs are just that...fixed.They cannot be altered and have no role in my recommendation about the future pricing. On the other hand, Variable costs has diminishing returns where the marginal cost of producing more output will rise.This will ultimately impact Marvin's ability to make a profit.