Noticing that profits on college text books are very high, the Beast Book Store (BBS), with the help of a venture capitalist, has gone into text book publishing. In its current production range its average total cost is approximately equal to its marginal cost which it estimates to be about $25. It has estimated that price elasticity of demand for its books at current price levels to be about -1.5.The manager of BBS uses mark-up pricing to price the books that it sells using a 150% mark-up (even with this mark-up BBS can still underprice most other book publishers). Assuming that BBS wants to maximize short-term profits on its book sales and initially enjoys a monopoly in the local college textbook production market, is this a good pricing procedure?Harvard and other local colleges soon start publishing companies of their own increasing competition and causing the price elasticity of demand for BBS books to increase to -2.0. Assuming that BBS’s demand curve that generates this -2.0 price elasticity estimate will not significantly change as BBS changes its prices, should the manager continue to use the same mark-up pricing procedure? How would you explain your view to the manager assuming that she has not taken managerial economics?Given the -2.0 price elasticity estimate under the assumptions in b), what price would you recommend and how would you explain your price selection to the manager?

1. Average total cost refers to the total cost being divided by the total quantity of output being…

Answered: very high, the Beast Book Store (BBS),…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Noticing that profits on college text books are very high, the Beast Book Store (BBS), with the help of a venture capitalist, has gone into text book publishing. In its current production range its average total cost is approximately equal to its marginal cost which it estimates to be about $25. It has estimated that price elasticity of demand for its books at current price levels to be about -1.5.
The manager of BBS uses mark-up pricing to price the books that it sells using a 150% mark-up (even with this mark-up BBS can still underprice most other book publishers). Assuming that BBS wants to maximize short-term profits on its book sales and initially enjoys a monopoly in the local college textbook production market, is this a good pricing procedure?
Harvard and other local colleges soon start publishing companies of their own increasing competition and causing the price elasticity of demand for BBS books to increase to -2.0. Assuming that BBS’s demand curve that generates this -2.0 price elasticity estimate will not significantly change as BBS changes its prices, should the manager continue to use the same mark-up pricing procedure? How would you explain your view to the manager assuming that she has not taken managerial economics?
Given the -2.0 price elasticity estimate under the assumptions in b), what price would you recommend and how would you explain your price selection to the manager?

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