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Calculating the Profit Maximizing Price Level

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You are asked to help in setting the subscription rates of a monthly magazine. As expected, the major component of cost is fixed or sunk; so we ignore it in what follows. Variable cost including printing, shipping, and mailing comes to $30 per year per subscriber. The publisher has an extensive data set suggesting that annual magazine subscription demand is: D = 100 - p. Here p is the price of an annual subscription.

SHOW ALL EXCEL FORMULAS AND INPUTS FOR SOLVER (QUESTION #3)

1) If the publisher sets p = 47 what will her profit be?

2) Write down an algebraic expression for total profit to the publisher as a function of p.

3) Use SOLVER to compute the profit maximizing choice of p.

4) Suppose the magazine has another source of revenue: advertising. Consumers do not care about the amount of advertising contained in each issue, but advertisers care about the number of subscribers. For every subscription purchased, the magazine gets $20 in advertising revenue. Taking into account the revenue from advertising, should the publisher lower or raise its annual subscription price p? What should the new profit maximizing level of p be?

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Solution Summary

This solution determines the profit maximizing price in the given case by using Solver tool in MS Excel.

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