Question

1. Problems and Applications Q1

A publisher faces the following demand schedule for the next novel from one of its popular authors:

Price	Quantity Demanded
(Dollars)	(Copies)
40	0
36	50,000
32	100,000
28	150,000
24	200,000
20	250,000
16	300,000
12	350,000
8	400,000
4	450,000
0	500,000

The author is paid $800,000 to write the novel, and the marginal cost of publishing the novel is a constant $4 per copy.

Complete the second, fourth, and fifth columns of the following table by computing total revenue, total cost, and profit at each quantity.

Quantity	Total Revenue	Marginal Revenue	Total Cost	Profit
(Copies)	(Dollars)	(Dollars)	(Dollars)	(Dollars)
0
50,000
100,000
150,000
200,000
250,000
300,000
350,000
400,000
450,000
500,000

Which of the following quantity–price combinations would a profit-maximizing publisher choose? (Note: If the publisher is indifferent between more than one choice, select all of the indifferent combinations.) Check all that apply.

150,000 copies at a price of $28

200,000 copies at a price of $24

250,000 copies at a price of $20

300,000 copies at a price of $16

Complete the third column of the previous table by computing marginal revenue. (Hint: Recall that MR=ΔTRΔQMR=ΔTRΔQ.)

True or False: At each quantity, marginal revenue is less than the price.

True

False

Use the black points (plus symbol) to graph the marginal revenue from the 50,000th, 100,000th, 150,000th, 200,000th, 250,000th, and 300,000th copy of the novel. Remember to plot from left to right and to plot between integers. For example, if the marginal revenue of increasing production from 50,000 copies to 100,000 copies were 10, then you would plot a point at (75, 10). Next use the orange line (square symbol) to graph the marginal-cost curve faced by the publisher. Finally, use the blue points (circle symbol) to graph demand at the following quantities (in thousands): 0, 50, 100, 150, 200, 250, 300, 350, 400, 450, and 500.

Marginal RevenueMarginal CostDemandDeadweight Loss0501001502002503003504004505004036322824201612840-4PriceQuantity (Thousands of copies)200, 24Y-Intercept: 4Slope: 0

The marginal-revenue and marginal-cost curves intersect at a quantity of   copies.

On the previous graph, use the black triangle (plus symbols) to shade the area representing deadweight loss.

If the author were paid $1 million instead of $800,000 to write the book, the publisher would   the price it charges for a copy of the novel.

Suppose the publisher was not profit-maximizing but was concerned with maximizing economic efficiency, and the author of a novel was paid $800,000 to write the book.

In this case, the publisher would charge

for a copy of the novel and earn a profit of

. (Note: If the publisher experiences a loss, be sure to enter a negative number for profit.)

Answer 1

We are given demand schedule faced by the publisher for a novel from one of tits popular author

Publisher pays $800,000 to author to write the novel, which is fixed cost for the publisher

P	Q	TR	MR	TC	MC	profit
40	-	-		800,000
36	50,000	1,800,000	36	1,000,000	4	800,000
32	100,000	3,200,000	28	1,200,000	4	2,000,000
28	150,000	4,200,000	20	1,400,000	4	2,800,000
24	200,000	4,800,000	12	1,600,000	4	3,200,000
20	250,000	5,000,000	4	1,800,000	4	3,200,000
16	300,000	4,800,000	-4	2,000,000	4	2,800,000
12	350,000	4,200,000	-12	2,200,000	4	2,000,000
8	400,000	3,200,000	-20	2,400,000	4	800,000
4	450,000	1,800,000	-28	2,600,000	4	-800,000
0	500,000	-	-36	2,800,000	4	-2,800,000

Question 1) we are asked to complete the table with columns of TR,MR,TC,MC ,profit

Question 2) we are asked to find quantity and price combinations that a profit maximizing publisher would choose

As per table , maximum profit the publisher can achieve is $3,200,000 at the prices of $24 and $230 where 200,000 and 250,000 copies of the novel are sold respectively

200,000 copies at a price of $24

250,000 copies at a price of $20

Question 3) We are asked whether "at each quantity, marginal revenue is less than price"

False

marginal revenue is less than price at all quantities except the point where 50,000 copies are sold. At this point, price is $36 and equal to marginal revenue.

Marginal revenue is always less than price. Price falls when quantity rises because the demand curve slopes downward, but marginal revenue falls even more than price because the firm loses revenue on all the units of the good sold when it lowers the price.The idea is that as price decreases, even though the publisher's sales increase (because more people buy the book), he must also sell all the other books at a lower price than before, thus obtaining a lower revenue.

Question 4) we are asked to find the deadweight loss associated with output level where MR=MC

Marginal cost is constant for all quantities at $4

Marginal revenue is equal to marginal cost when  250,000 copies are sold

Price is equal to marginal cost when 450,000 copies are sold

Deadweight loss means that the total surplus is less than it would be if the market were competitive (price=marginal cost), because the monopolist produces less than the socially efficient level of output

Question 5) we are asked profit maximizing price quantity combination if publisher pays author $1,000,000 instead of $800,000. the publisher would not change the price, because there would be no change in marginal cost or marginal revenue. The only thing that would be affected would be the firm’s profit, which would fall from $3,200,000 to $3,000,000

P	Q	TR	MR	TC	MC	profit
40	-	-		1,000,000
36	50,000	1,800,000	36	1,200,000	4	600,000
32	100,000	3,200,000	28	1,400,000	4	1,800,000
28	150,000	4,200,000	20	1,600,000	4	2,600,000
24	200,000	4,800,000	12	1,800,000	4	3,000,000
20	250,000	5,000,000	4	2,000,000	4	3,000,000
16	300,000	4,800,000	-4	2,200,000	4	2,600,000
12	350,000	4,200,000	-12	2,400,000	4	1,800,000
8	400,000	3,200,000	-20	2,600,000	4	600,000
4	450,000	1,800,000	-28	2,800,000	4	-1,000,000
0	500,000	-	-36	3,000,000	4	-3,000,000

Question 6)

Suppose the publisher was not profit-maximizing but was concerned with maximizing economic efficiency, and the author of a novel was paid $800,000 to write the book.

In this case, the publisher would charge $ 4 for a copy of the novel, which is equal to marginal cost and earn a profit of (-800,000) that is loss. At that price, the publisher would have negative profits equal to the amount paid to the author.