Monopoly Pricing Strategy for Publishers

How can a publisher maximize profit for a popular author's novel?

Given the demand schedule and cost information, what quantity should the publisher choose to maximize profit? What price would be ideal?

Final answer:

The publisher's profit-maximizing quantity is where marginal revenue equals marginal cost. The price the publisher would charge is the highest price consumers are willing to pay for that quantity, as indicated by the demand schedule. Total revenue, total cost, and profit are calculated for each quantity to find where profits are maximized.

Explanation:

To calculate total revenue (TR), total cost (TC), and profit at each quantity for the publisher, we analyze the data from the demand schedule, author payment, and marginal cost.

Total Revenue is calculated by multiplying the Price by the Quantity Demanded at each level. Total Cost is the sum of the fixed cost to pay the author ($2 million) and the variable costs of publishing the books (Marginal Cost x Quantity). Profit is the Total Revenue minus the Total Cost.

To find the profit-maximizing quantity, the publisher looks for the quantity where marginal revenue (MR) equals marginal cost (MC). MR is the change in total revenue from selling an additional unit, while MC is constant at $10 per book.

The profit-maximizing publisher would choose the quantity where MR is just about to fall below MC. Once the quantity is determined, the publisher would then charge the corresponding price from the demand schedule that consumers are willing to pay for that quantity.

As the fixed cost of the author's payment is a sunken cost, it will not affect the marginal decisions but will be relevant for calculating total cost and therefore the overall profit at each quantity level.