Assume a monopolistic publisher has agreed to pay an author 10 percent of the total revenue

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Assume a monopolistic publisher has agreed to pay an author 10 percent of the total revenue

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Assume a monopolistic publisher has agreed to pay an author 10 percent of the total revenue from the sales of a book. Will the author and the publisher want to charge the same price for the book? Explain. 

Answer and explanationsSolution by a verified expert

Explanation
A monopolist firm always aims to maximize profit by setting its marginal revenue equal to the marginal costs. This implies producing lesser units of any commodity and selling at a relatively higher price.

The monopolist publisher would seek to maximize profit by publishing books at the level where MR = MC.

On the other hand, the author receives 10% of the publisher's revenue. Consequently, the author would prefer to choose the price and quantity combination such that the total revenue is maximum. This condition gets satisfied when the marginal revenue from selling a book is zero. The corresponding price elasticity of demand is unity and the price level is less than the profit-maximizing price level.

The publisher would so like to opt for a higher price at the profit-maximizing output, and the author would like to go for a relatively lower price at the level of quantity where total revenue is maximum.

Verified Answer
The publisher is the monopolist who would like to maximize their profit where the marginal revenue equals the marginal cost and the author who gets 10 percent of the revenue would like to maximize his share at the price-quantity combination when marginal revenue equals zero.

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