Final answer:
The author would prefer a higher price than the publisher since their earnings are tied to total revenue, with a 10% royalty agreement. For a firm entering a monopolist's market with lower prices, there is a potential for a competitive reaction from the monopolist. A monopolist seeks to maximize profits by determining the quantity and price where marginal revenue meets the marginal cost.
"The correct option is approximately option 2"
Step-by-step explanation:
When considering the scenario where an author agrees to receive 10 percent of the total revenue from the sales of a book, we can analyze their price preference relative to a monopolistic publisher. In this case, the author would prefer the higher price, which the publisher sets, because their earnings are directly proportional to the total revenue. This is statement 2) The author would prefer a higher price than the publisher.
Now, when managing a small firm and contemplating entering the market of a monopolist who charges a high price, it is crucial to ponder how the monopolist might react. If you plan to charge 10% less, the monopolist could respond aggressively by lowering their prices or improving their product, essentially engaging in a price war or competition to maintain market dominance. Your strategy must consider the possibility of a direct and possibly fierce reaction from the existing monopoly.
The monopolist's decision-making process for choosing output and price entails aiming for the profit-maximizing quantity at which marginal revenue equals marginal cost. The monopoly then determines the market price based on this quantity and the demand curve, resulting in a price above average cost, leading to a profit margin protected by barriers to entry. In cases of perfect price discrimination, the monopolist captures all consumer surplus, yielding the maximum profits possible while producing an output level similar to that in a perfectly competitive market.