The college and graduate-school textbook market is one of the most profitable segments for book publishers. A best-selling accounting text- published by Old School Inc (OS)-has a demand curve: P = 150 - Q, where Q denotes yearly sales (in thousands) of books. (In other words, Q = 20 means 20 thousand books.) The cost of producing, handling, and shipping each additional book is about $40, and the publisher pays a $10 per book royalty to the author. Finally, the publisher's overall marketing and promotion spending (set annually) accounts for an average cost of about $10 per book.
a. Determine OS's profit-maximizing output and price for the accounting text.
b. A rival publisher has raised the price of its best-selling accounting text by $15. 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, Old School plans to contract out the actual printing of its textbooks to outside vendors. OS 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)?