Consider the problem of setting a price for a book. The marginal cost of product
ID: 1227283 • Letter: C
Question
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 minus $0.20 per textbook: Starting with a price of $44, a price cut of $0.20 will increase the quantity demanded by one textbook, or for every dollar the price falls, five more textbooks are purchased. For example, here are some combinations of price and quantity: The publisher will choose the profit-maximizing price of $nothing . (Choose the price that comes closest to maximizing profit from the table above.)
Price per textbook:
$44
$40
$36
$32
$30
Quantity of textbooks:
80
100
120
140
150
Price per textbook:
$44
$40
$36
$32
$30
Quantity of textbooks:
80
100
120
140
150
Explanation / Answer
So from the table we see that profit is maximum when price is 40 and quantity sold is 100
Price P Quantity Q Revenue R= P*Q Marginal Cost MC Total Cost TC = MC*Q Profit = R-TC 44 80 3520 20 1600 1920 40 100 4000 20 2000 2000 36 120 4320 20 2400 1920 32 140 4480 20 2800 1680 30 150 4500 20 3000 1500