Problem # 4

Idea Inc. is a small publishing company operating in the college and textbook market, which is one of the most profitable segments for book publishers. Idea Inc. has a cost of producing, handling, and shipping of about $30 for each additional book. The publisher's overall marketing and promotion spending (set annually) accounts for an average cost of about $10 per book. Idea Inc.'s best-selling game theory text has a demand curve: P = 200 - Q, where Q denotes yearly sales (in thousands) of books. For this text Idea Inc. pays a $10 per book royalty to the author.

a) Determine the profit-maximizing output and price for the game theory text.

b) A rival publisher has raised the price of its best-selling game theory text by $20. One option is to exactly match this price hike and so exactly preserve your level of sales. Do you endorse this price increase? (Explain briefly why or why not.)

c) To save significantly on fixed costs, Idea Inc. plans to contract out the actual printing of its textbooks to outside vendors. When this happens, Idea Inc. expects to pay a somewhat higher printing cost per book (than in part a) from the outside vendor (who marks up price above its cost to make a profit). How would outsourcing affect the output and pricing decisions in part a?