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Profit Maximization Example Problem

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Demand Function for a textbook: P=100-.005Q. The publisher must pay $20 per book in prinitng and distribution costs, and in addition, it must pay the author a $20 royalty for each book sold.

A) How can I find which price will maximize the publisher's profit? How much profit will be earned exactly? And what will be the total royalty payment earned by the author?

B) What if a consultant comes along and says that they should enter into a profit-sharing agreement in which the author gets 40% of the profit and the publisher 60%? What price should the publisher set with this agreement?

C) Will both the author and the publisher prefer the new agreement to the old one? Which agreement will the students who buy the textbook prefer?

Thanks in advance for your help!

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Solution Summary

Provides steps necessary to determine profit maximization.

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