I am very confused as to why choosing writer I over Writer III would make any sense.
The breakeven from where on writer I will be cheaper than Writer III is at 1'500'000 books.
The TAM is only 1'000'000. Even when considering population growth it doesnt make sense.
There is 50% market missing and also that only works when 100% of the market is captured.
Long-term contract binding is not sufficient in my opinion to chose a writer 100k more expensive to hope to one day grow the market by 50% while simultaneously capturing 100% of it.
The case explains "it has come to their attention that some private schools are considering changing their first-grade textbooks, for which they would need a publishing agency." Presumably the rewrite of the textbooks would be a once off process, rather than a recurring one?
If so, we can assume that the contracted writer's base salary will fall away after a year or two, and the royalty payments into perpetuity become the only real cost factor. In that case Writer 1 is indeed the cheaper long-term option.