Question One
The Wise Economists, a top rock band, have just finished recording their latest music album. Their record company's marketing department have determined that the demand for downloads for the album is as follows:
|
Price
|
No. of downloads
|
Total Revenue
|
Total Cost
|
Total Profit
|
Marginal Revenue
|
Marginal Cost
|
|
24
|
10,000
|
240,000
|
50,000
|
190,000
|
|
|
|
22
|
20,000
|
440,000
|
100,000
|
340,000
|
20
|
5
|
|
20
|
30,000
|
600,000
|
150,000
|
450,000
|
16
|
5
|
|
18
|
40,000
|
720,000
|
200,000
|
520,000
|
12
|
5
|
|
16
|
50,000
|
800,000
|
250,000
|
550,000
|
8
|
5
|
|
14
|
60,000
|
840,000
|
300,000
|
540,000
|
4
|
5
|
The company can produce the album with no fixed cost and a variable cost of €5 per download:
a. Find total revenue for quantity equal to 10,000, 20,000 and so on. What is the marginal revenue for each 10,000 increase in the quantity sold?
b. What quantity of downloads would maximise profit? What would the price and profit be?
Profit is maximized at quantity 50,000 and price of 16. Profit=550,000
c. If you were the Wise Economists' agent, what recording fee would you advise them to demand from the record company and why?