Question

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A group of students has decided to form a company to publish a guide to eating establishments located in the vicinity of all major college and university campuses in the USA. In planning for an initial publication of 6,000 copies, they estimated the cost of producing this book to be as follows:

By engaging in this business, the students realized that they would have to give up their summer jobs. Each student made an average of $4,000 per summer. However, they believed they could keep expenses down by doing much of the research for the book by themselves with no immediate compensation.
They decided to set the retail price of the book at $12.50 per copy. Allowing for the 20 percent discount that retail stores in their state generally required, the students anticipated a per-unit revenue of about $10.00. The director of the campus bookstore advised them that their retail price was too high, and that a price of about $8.75 would be more reasonable for a publication of this kind.
One of the students, an economics, asked the bookstore manager to provide her with historical data on sales and prices of similar books. From these data, she estimated the demand for books of this kind to be Q=18,500-1,000P, where Q is the number of books sold per year and P is the retail price of books.

1.Explain the impact on the optimal price of designating the “miscellaneous” cost of item as fixed versus variable. (Hint: Do the pricing analysis assuming miscellaneous is a fixed cost and compare it with an analysis the assumes it is a variable cost.)
2. Under what circumstances do you think the average variable cost would increase? Do you think the law of diminishing returns would play a role in increasing AVC? Explain.
3. Under what circumstances do you think the AVC would decrease? Explain.

Paper	$12,000
Research	2,000
Graphics	5,000
Reproduction services	8,000
Miscellaneous	5,000
Personal computer	2,000
Desktop publishing software	500
Overhead	5,500
Binding	3,000
Shipping	2,000

Answer 1

The total cost that is occuring is : $ 50,000, the breakage of cost is mentioned below.

Paper	$12,000
Research	2,000
Graphics	5,000
Reproduction services	8,000
Miscellaneous	5,000
Personal computer	2,000
Desktop publishing software	500
Overhead	5,500
Binding	3,000
Shipping	2,000

Demand of book can be gained by the folloing linear equation where Q is the quantity of book and P is the price:

Q=18,500-1,000P

There are three price suggested by different stake holders : $12.50 , $10 and $8.75. According we have these three quantity: 6000, 8500 and 9750.

1. As student decide as initially to produce 6000 copies, anad accordingly the retail price of $12.50.

In this way from the demand equation the demand and supply will meet and it will be the optimal price point for the book.

2. Average Variable cost will increase when students decide to produce more than 6000 copies as it will increase the cost of paper, reproduction services, binding and shipping. From the law of diminishing return the average cost of varibale will increase as the volume of booked to be sold at a price of $8.75 is 9750. And when the price is low the demand will increase corrospondingly and Volume will cover the loss occur due to the less value.

3. In case when the price is not reduced and demand is stagnant, it will attain a situationn of satiration. In this condition if the price of the book after discout is considered as $10 and demand is 8500, in such condition the total revenue will decrease and Average cost of variable is more than that of the revenue generated.