Chapter 15, Problem 1PA

### Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050

Chapter
Section

### 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 = ΔTR/ΔQ.) 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

Subpart (e):

To determine
Change in profit.

Subpart (f):

To determine
Maximize economic efficiency.

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