Econ 12, Foldvary

Problem Set #9, due Feb. 6

10 pts.

If an author earns a royalty of 10% of the total sales revenue of his or her book, and all he or she cares about is maximizing money income on that book, then does he or she prefer that the price of the book be greater than, less than, or equal to the price set by the profit-maximizing publisher? And why?

Assume that both publisher and author have the same beliefs about the demand, that the author wishes only to maximize his royalties, and that the book has a copyright. The market structure is monopolistic competition because the book is a substitute for other similar types. The author does not care what profit the publisher makes on his book or about maximizing sales, he only cares about the royalties on this one book.