Hi,
I would really appreciate it if someone could help me with these questions:
An author earns royalties from his book that are specified as 10% of the book's selling price. The demand curve for this is straight and downward sloping.
1. What rule does the author want his publisher to follow in determining how many copies of book to sell?
2. The publisher want to determine how many copies of the book to sell so what rule does he follow?
3. Does the author or the publisher sell more books?
With respect to the price of the book, the author and publisher will act as monopolists. So, start by drawings a demand curve and marginal revenue curve for a typical monopolist.
With respect to book production, the author has no costs, so he/she will want to price the book where his Marginal Cost=Marginal Revenue = 0.
The publisher, at a minimum, has printing costs, as well as a royalty paid to the author. That is, the publisher has positive marginal costs. He too will want to price the buook where his Marginal Cost=Marginal revenue.
With this, you should be able to answer number 3.
To answer these questions, let's break down the information provided step by step:
1. The author wants his publisher to follow the profit maximization rule in determining how many copies of the book to sell. This means that the publisher should set the price and quantity of books in a way that maximizes their joint profits.
2. The publisher, as a profit-maximizing entity, will follow the same rule as the author: to determine how many copies of the book to sell, the publisher will set the price and quantity in a way that maximizes their joint profits.
3. To compare the number of books sold by the author and the publisher, we need to consider their respective pricing strategies and marginal cost curves.
As monopolists, both the author and the publisher will set their prices based on the demand curve and the marginal revenue curve. With a downward-sloping demand curve, the monopolist will face declining marginal revenue.
The author, who incurs no production costs, will aim to maximize his royalties by pricing the book at a point where marginal cost (which is effectively zero) equals marginal revenue. In this case, the author's marginal revenue curve is the same as the demand curve.
However, the publisher has printing costs and royalties to pay to the author. So, the publisher's marginal cost curve will be positive. The publisher will want to price the book where marginal cost equals marginal revenue.
When comparing the number of books sold, you need to look at the price and quantity combination at which both the author and the publisher maximize their profits. The one who sets the price and quantity to sell at a higher level will sell more books.
By analyzing the demand curve, marginal cost, and marginal revenue of the author and the publisher, you can determine which one will sell more books.
Using this information, you should be able to answer question number 3.