BOOKSTORE OPPORTUNITY COST PROBLEM

Oakland University Bookstore (OUB) has a capacity of 5,000 books. Its markup on textbooks, T, is $4 (i.e.,
PT= CT + 4), and thereby makes a profit of $20,000. OUB hires you to determine the demand for a new
bestseller entitled: “How to Get Good Grades without Studying” (HTGGG). Based on your estimates, you
determine that the demand for this book can be represented by the function: Q B = 2400 – 100PB, where PB is
the price per copy of “HTGGG,” and QB is the anticipated quantity of “HTGGG” that would be demanded
from OUB. OUB obtains “HTGGG” at a price of $12 per copy, and seeks to carry as many copies as would
allow it to maximize profit, given that it is guaranteed a profit margin of $4 on each textbook it carries.

i. Advise OUB as to how many copies of "How to Get Good Grades" it should order.

PB=24 – 0.01QB
MRB=24 – 0.02QB=12+4=16
QB=400, QT=4,600, PB=20

ii. As a result of other area bookstores’ decision to carry "How to Get Good Grades"; OUB's market share is
smaller than you anticipated. You now re-estimate OUB's demand for "HTGGG" to be: Q B = 900 – 50PB.
However, having already placed its order for the best seller according to your original recommendation (in [a]
above), OUB asks you for a new price recommendation. Advise OUB on the best price to charge when: a)
the book's publisher has a no return policy.

PB=18 – 0.02QB
MRB=18 – 0.04QB=4
QB = 14/0.04 = 350, PB = $11 (implying a loss of $1/copy).

Thus, the bookstore should stock QT = 4650 copies of textbooks, and dump 50 copies of "HTGGG".

b) the publisher offers a 100% refund on unsold copies.

MRB=18 – 0.04QB=16
QB = 2/0.04 = 50, PB = 17

Thus, the bookstore should stock QT = 4950 textbooks, and return 350 copies of "HTGGG" to the publisher.