2.7 William Germano previously served as the vice president and publishing director at the Routledge publishing company. He once gave the following description of how a publisher might deal with an unexpected increase in the cost of publishing a book: It’s often asked why the publisher can’t simply raise the price [if costs increase]…. It’s likely that the editor [is already] … charging as much as the market will bear …. In other words, you might be willing to pay $50.00 for a … book on the Brooklyn Bridge, but if … production costs [increase] by 25 percent, you might think $62.50 is too much to pay, though that would be what the publisher needs to charge. And indeed the publisher may determine that $50.00 is this book’s ceiling—the most you would pay before deciding to rent a movie instead.

a. According to what you have learned in this chapter, how do firms adjust the price of a good when there is an increase in cost? Use a graph to illustrate your answer.

b. Does the model of monopolistic competition seem to fit Germano’s description? If a publisher does not raise the price of a book following an increase in its production cost, what will be the result?

c. How would the elasticity of demand for published books affect the ability of the publishing company to raise book prices when costs increase?