25-16. A firm that sells e-books-books in digital form downloadable from the Int

Question

25-16. A firm that sells e-books-books in digital form downloadable from the Internet-sells all e-books relating to do-it-yourself topics (home plumbing, gardening, and the like) at the same price. At pres- ent, the company can earn a maximum annual profit of $25,000 when it sells 10,000 copies within a ycar's time. The firm incurs a 50-cent expense each time a consumer downloads a copy but the company must spend $100,000 per year developing new editions of the e-books. The com pany has determined that it would earn zero eco- nomic profits if price were equal to average total cost, and in this case it could sell 20,000 copies Under marginal cost pricing, it could sell 100,000 copies. (See pages 590-592.) a. In the short run, what is the profit-maximizing price of e-books relating to do-it-yourself top- ics. b. At the profit-maximizing quantity, what is the average total cost of producing e-books?

Explanation / Answer

Answer:-

?a) In the short run profit maximizing price = marginal cost = 50 %cent

?b) Average total cost at profit maximizing quantity = (.5*10000+100000)/10000 = $10.5

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