Question

The OnlyPress publishing company is the sole provider of required textbooks for a large number of introductory economics students. OnlyText has determined that the demand function for its textbooks is given by Q = 1/p^2 where Q is the quantity of textbooks sold (in thousands of books) and p the price charged by OnlyText (in hundreds of dollars). Note that the derivative of 1/p2 = p −2 with respect to p is −2p −3 .

(a) Is it reasonable to think that OnlyPress is a perfectly competitive firm? Why or why not?

(b) Calculate the demand elasticity.

(c) Without doing any calculation, does the MR ever become negative?

(d) Obtain the marginal revenue and plot it together with the demand curve.

(e) Suppose that the marginal cost is constant at 1. Find the profit-maximizing price.

(f) What is the price that would maximize the total social surplus in the market for OnlyPress’s books?

(g) Would OnlyPress have any producer surplus at that price? Why or why not?

(h) Suppose that OnlyPress has some fixed costs of production. Would OnlyPress stay in business if it had to charge the socially optimal price?

Answer 1