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Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050

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BuyFindarrow_forward

Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050
Textbook Problem

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

Price Quantity Demanded
$ 100 0 novels
90 100,000
80 200,000
70 300,000
60 400,000
50 500,000
40 600,000
30 700,000
20 800,000
10 900,000
0 1,000,000

The author is paid $2 million to write the book, and the marginal cost of publishing the book is a constant $10 per book.

a. Compute total revenue, total cost, and profit at each quantity. What quantity would a profit-maximizing publisher choose? What price would it charge?

b. Compute marginal revenue. (Recall that MR = ΔTRQ.) How does marginal revenue compare to the price? Explain.

C. Graph the marginal-revenue, marginal-cost, and demand curves. At what quantity do the marginal-revenue and marginal-cost curves cross? What does this signify?

d. In your graph, shade in the deadweight loss. Explain in words what this means.

e. If the author were paid $3 million instead of $2 million to write the book, how would this affect the publisher’s decision regarding what price to charge? Explain.

f. Suppose the publisher was not profit-maximizing but was concerned with maximizing economic efficiency. What price would it charge for the book? How much profit would it make at this price?

Subpart (a):

To determine
Revenues, costs and profits.

Explanation

Table -1 shows the total quantity and respective price level.

Table -1

Price                   Quantity
100    0
90 100,000
80 200,000
70 300,000
60 400,000
50 500,000
40 600,000
30 700,000
20 800,000
10 900,000
0 1,000,000

Total revenue can be calculated by using the following formula.

Total Revenue=Price × Quantity (1)

Substitute the respective values in Equation (1) to calculate the total revenue at price $90.

Total revenue=90×100,000=9,000,000

Total revenue is $9,000,000.

Total cost can be calculated by using the following formula.

Total Cost=Cost × Quantity (2)

Substitute the respective values in Equation (2) to calculate the total cost at quantity 100,000 units.

Total Cost=2×100,000=2,000,000

Total cost is $2,000,000.

Profit can be calculated by using the following formula.

Profit=Total revenueTotal cost (3)

Substitute the respective values in Equation (3) to calculate the profit for the quantity 100,000 units

Subpart (b):

To determine
Calculate marginal revenue.

Subpart (c):

To determine
Profit maximization.

Subpart (d):

To determine
Deadweight loss.

Subpart (e):

To determine
Change in profit.

Subpart (f):

To determine
Maximize economic efficiency.

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