Answer to Question #205917 in Microeconomics for ali

Question

Assume a monopolistic publisher agreed to pay an author 10% of the total revenue from the sale of

the text. Will the author and the publisher want to charge the same price for the text? Explain in

the light of price discrimination?

Answer 1

Solution:

In the light of price discrimination, the author would prefer a lower price than the publisher and, therefore, they would not want to charge the same price for the text.

 

The publisher is a monopolist with the desire to maximize profits by producing the output at which marginal revenue (MR) equals marginal cost (MC). The monopoly price will be higher than the price that would be in a purely competitive market. As such, the monopolistic publisher will apply price discrimination by charging different prices for the same text depending on what the publisher thinks they can get the consumer to agree to since they control the price and market. The publisher will charge each consumer the maximum price they will pay.

 

The author receiving 10 percent of the total revenue will maximize his or her payment if the book is charged at the point where marginal revenue (MR) equals zero (MR = 0). This will happen at the point where total revenue is at its maximum and the price elasticity of demand is equal to 1. A such, the author will, therefore, prefer a lower price than that of the publisher.