If an author earns a royalty (income) of 10% of the total sales revenue of his o

Question

If an author earns a royalty (income) of 10% of the total sales revenue of his or her book, and all the author cares about is maximizing money income on that book, then does the author 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.)

Explanation / Answer

The author would prefer to have price of the book less than the price set by profit maximizing publisher.

At lower price higher number of books could be sold which maximizes revenue. The author is concerned about revenue, because the royalty income is based on it.

Publisher wants to stay at the equilibrium point, MR = MC. It gives publisher the optimum price and quantity to recover cost and earning profit. But the author is not concerned about cost or profit. He or she wants only increasing marginal revenue. Since the MR curve of a monopolistic firm is downward slopping from left to right, at lower price only higher quantity could be sold for maximizing revenues.

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