A publisher with a geographic monopoly faces the following demand schedule for the next novel from one of its authors: the author is paid $2,000,000 to write the book, and the marginal cost of publishing the book is a constant $10 per book.
Price Quantity Demanded Novels
$100 0
$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
a. Compute total revenue, total cost and profit at each quantity. What quantity would a profit maximizing publisher choose?
b. Compute marginal revenue. How does marginal revenue compare to price? Explain.
c. Graph the marginal revenue, marginal cost and demand curves. At what quantity do marginal revenue and marginal cost cross? What does this signify?
d. What price will the publisher set?
e. In your graph shade the deadweight loss. Explain what this means.
f. If the author were paid $3 million instead of $2 million to write the book, how would this affect the publisher’s decision on what price to charge?
g. If the publisher was not a profit maximizing publisher but was concerned with maximizing economic efficiency, what price would it charge for the book? How much profit would it make at that price?