When Braeburn Publishing priced its poetry book at $5, it sold 5 books, and when it priced the volume at $8, it sold 4 books. You can calculate that its revenues were higher with the higher price. Suppose that, from further test marketing, this firm determines that it faces the demand curve described by the following schedule.
a. Graph the demand curve for the poetry book, labeling carefully. (Compare your graph to Figure 5.1.)
b. Calculate total revenue and marginal revenue at each output level, and add a marginal revenue curve to your graph.
c. Can the $8 price be Braeburn's profit-maximizing choice? Why or why not?
d. Suppose that, thanks to computerized, ondemand publishing technology, Braeburn can produce any number of books at a constant cost of $5 each. (That is, average cost and marginal cost are both $5 for any quantity of books, and total costs are simply the number of books times $5.) Add a marginal cost curve to your graph. (It will not look like the "usual" MC curve-it will be horizontal.)
e. What are Braeburn's profit-maximizing price and output levels for the poetry book? State these, and label them on the graph.
f. What level of profit would Braeburn earn with the $8 price? (Recall that profits equal total revenue minus total cost.) What is the level of profit with the price you just found that maximizes profit?