Microeconomics 6th Edition by Robert Hall, Shirley Kuiper, Marc Lieberman

Exercise 14

Down On Our Luck Studios has spent $100 million producing an awful film,A Depressing Story About a Miserable Person. If the studio releases the film,the most cost-effective marketing plan would cost an additional $5 million,bringing the total amount spent to $105 million. Box office sales under this plan are predicted to be $12 million,which would be split evenly between the theaters and the studio. Additional studio revenue from video and DVD sales would be about $2 million. Should the studio release the film? If no,briefly explain why not. If yes,explain how it could make sense to release a film that cost $105 million but earns only $12 million.