Textbook publishers hope to maximize profits. Authors, however, ...

[nevelica]

Textbook publishers hope to maximize profits. Authors, however, face very different incentives. Authors are typically paid royalties, which are a specified percentage of total revenue from the sale of a book.
 
  And so, for example, if an author's contract says that she will receive 20 percent of the revenues from the sale of a text and the publisher's total revenues are 100,000, the author's royalties will be 20,000 . Who will prefer a higher price for the text, the publisher or the author?

Question 2

How do changes in the demand for and supply of loanable funds change the real interest rate and quantity of loanable funds?
 
  What will be an ideal response?

[gabrielle_lawrence]

Answer to Question 1

The publisher is likely to prefer a higher price for the text. The diagram below helps explain this problem. The publisher wants to maximize profits and therefore would prefer to sell Q1 books, the quantity that equates MR and MC. The publisher would therefore like to choose the price P1 . In contrast, an author who wishes to maximize royalties will want to maximize total revenues; the author in our example maximizes 20 percent of total revenues by maximizing total revenues. In order to maximize total revenue, the author would choose Q2, the quantity such that MR = 0 . If MR = 0, then total revenues will not rise if the publisher sells one more book nor rise if the publisher sells one fewer book. The author would therefore like to choose P2, which is less than the publisher's preferred price P1 .

Answer to Question 2

The real interest rate is determined by the supply of loanable funds and the demand for loanable funds. The equilibrium real interest rate is the real interest rate at which the quantity of loanable funds supplied equals the quantity of loanable funds demanded. Changes in the demand for or supply of loanable funds change the equilibrium real interest rate and equilibrium quantity of loanable funds. If the demand for loanable funds increases and the supply does not change, the real interest rate rises and the quantity of loanable funds increases. If the demand for loanable funds decreases and the supply does not change, the real interest rate falls and the quantity of loanable funds decreases. If the supply of loanable funds increases and the demand does not change, the real interest rate falls and the quantity of loanable funds increases. If the supply of loanable funds decreases and the demand does not change, the real interest rate rises and the quantity of loanable funds decreases.

[nevelica]

Gracias!

[amcvicar]

Great answer, keep it coming