Question

Digital Books, LLC is a company that sells e-books related to career advising and professional development. Digital Books, LLC earns a yearly positive economic profit of $25,000 if it can sell 10,000 e-books. Each time, a customer buys an e-book it incurs a cost of $0.50 (cost of downloading each e-book). Digital Books, LLC spends each year $100,000 developing new e-books (new topics and new editions). The profit maximizing price of e-books in the short run is $13. What is your prediction of the profit-maximizing price of e-books in the long run? Will the profit-maximizing price of e-books change in the long run? Why? Why not?

Answer 1

Short run price is 13. Marginal cost is 0.5 and fixed cost is 100,000. At Q = 10000, Total cost = 100000 + 5000 =

105000 and revenue = 13*10000 = 130000. This gives a profit of 25000

Attracted by this profits new firms will try to enter the market. If this firm has a monopoly or an oligopoly, it would

be able to sustain these profits in the long run by blocking entry. However, if it is not, entry of new firms will reduce

its profit down to zero and it would not be able to sell at a profit maximizing price. Hence, in the long run, whether it

will be be able to earn profits, depends on the type of market structure it operates in.