PLEASE READ THE QUESTIONS
A group of students has decided to form a company to publish aguide to eating establishments located in the vicinity of all majorcollege and university campuses in the USA. In planning for aninitial publication of 6,000 copies, they estimated the cost ofproducing this book to be as follows:
By engaging in this business, the students realized that theywould have to give up their summer jobs. Each student made anaverage of $4,000 per summer. However, they believed they couldkeep expenses down by doing much of the research for the book bythemselves with no immediate compensation.
They decided to set the retail price of the book at $12.50 percopy. Allowing for the 20 percent discount that retail stores intheir state generally required, the students anticipated a per-unitrevenue of about $10.00. The director of the campus bookstoreadvised them that their retail price was too high, and that a priceof about $8.75 would be more reasonable for a publication of thiskind.
One of the students, an economics, asked the bookstore manager toprovide her with historical data on sales and prices of similarbooks. From these data, she estimated the demand for books of thiskind to be Q=18,500-1,000P, where Q is the number of books sold peryear and P is the retail price of books.
1.Explain the impact on the optimal price of designatingthe “miscellaneous” cost of item as fixed versus variable. (Hint:Do the pricing analysis assuming miscellaneous is a fixed cost andcompare it with an analysis the assumes it is a variablecost.)
2. Under what circumstances do you think the average variable costwould increase? Do you think the law of diminishing returns wouldplay a role in increasing AVC? Explain.
3. Under what circumstances do you think the AVC would decrease?Explain.
Paper | $12,000 |
Research | 2,000 |
Graphics | 5,000 |
Reproduction services | 8,000 |
Miscellaneous | 5,000 |
Personal computer | 2,000 |
Desktop publishing software | 500 |
Overhead | 5,500 |
Binding | 3,000 |
Shipping | 2,000 |
