You are a magazine publisher. You are in the middle of a one-year rental contract for your factory that requires you to pay $400,000 per month, and you have contractual labor obligations of $1 million per month per the labor union agreement. You also have a marginal printing cost of $0.30 per magazine as well as a marginal delivery cost of $0.10 per magazine.
a. If sales fall by 20 percent from 1 million papers per month to 800,000 papers per month, what happens to the average fixed costs per paper, the marginal cost per paper, and the minimum amount that you must charge to break even on these costs?
b. If the elasticity of demand is around 1.25 (in absolute value), what is the profit-maximizing price?
c. What will the magazine publisher do in the long-run?