A textbook publisher is in monopolistic competition. The firm can sell no books at $100 a book, but for each $10 cut in price, the quantity of books it can sell increases by 20 books a day. The firm's average variable cost and marginal cost is a constant $20 per book. What is the publisher's profit-maximizing price?

Question

Quizplus · Accepted Answer

The profit-maximizing price occurs where marginal cost equals marginal revenue. Starting at $100, each $10 price cut increases sales by 20 books, so marginal revenue decreases by $0.50 per book. At $60, marginal revenue equals the constant marginal cost of $20, maximizing profit.

A Textbook Publisher Is in Monopolistic Competition