## (Solution Download) 1 Book Pricing Publishers versus Authors Consider the problem

1. Book Pricing: Publishers versus Authors. Consider the problem of setting a price for a book. The marginal cost of production is constant at \$20 per book. The publisher knows from experience that the slope of the demand curve is \$0.20 per book: Starting with a price of \$44, a price cut of \$0.20 will increase the quantity demanded by one book. For example, here are some combinations of price and quantity:
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a. What price will the publisher choose?
b. Suppose that the author receives a royalty payment equal to 10 percent of the total sales revenue from the book. If the author could choose a price, what would it be?
c. Why would the publisher and the author disagree about the price for the book?
d. Design an alternative author-compensation scheme under which the author and the publisher would choose the same price.
2. Restaurant Pricing. Consider a restaurant that charges \$10 for all you can eat and has 30 customers at this price. The slope of the demand curve is \$0.10 per meal, and the marginal cost of providing a meal is \$3. Compute the profit-maximizing price and quantity, and illustrate with a complete graph.
3. Empty Seats. Consider the Slappers, a hockey team that plays in an arena with 8,000 seats. The only cost associated with staging a hockey game is a fixed cost of \$6,000: The team incurs this cost regardless of how many people attend a game. The demand curve for hockey tickets has a slope of \$0.001 per ticket (\$1 divided by 1,000 tickets): Each \$1 increase in price decreases the number of tickets sold by 1,000. For example, here are some combinations of price and quantity:
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The owner s objective is to maximize the profit per hockey game (total revenue minus the \$6,000 fixed cost).
a. What single price will maximize profit?
b. If the owner picks the price that maximizes profit, how many seats in the arena will be empty? Why is it rational to leave some seats empty?
c. Suppose the owner could engage in price discrimination. Would you expect the number of filled seats to increase or decrease? Explain.
4. Negative Marginal Revenue. The manager of your firm is puzzled because the larger the quantity of output sold, the lower its total revenue. The manager gets weekly data in a table with two columns of numbers:
Quantity Sold and Total Revenue. After you do some computations and add a third and a fourth column of numbers, the manager looks at the new table and says, Aha, now I see why selling more decreases total revenue.
a. The third column of numbers has data on ________, and the fourth column has data on ________.
b. How do the additional columns of numbers explain the negative relationship between quantity sold and totalrevenue?

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