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The terms "folio" and "quarto" deal with how books were printed in Elizabethan England. A sheet of paper approximately 13.5 by 17.5 inches was generally used for book publishing. In a folio, each sheet was folded once, so that when printed on both sides it provided four pages of text in a relatively tall and thin book. In a quarto, each sheet was folded twice, so that when printed on both sides it created eight pages in a relatively short and fat book.
Quartos of many of Shakespeare's plays were printed during his lifetime, probably without his authorization. They are generally categorized as "Good Quartos" or "Bad Quartos". "Good Quartos" are those which, based on the quality of their texts, are thought to be copied from prompt books or Shakespeare manuscripts. "Bad Quartos" are believed to be made based on the memory of one or more actors.
The First Folio was published by two members of Shakespeare's acting company in 1623, seven years after Shakespeare's death. It is generally believed to be based on Shakespeare's manuscripts. Thus the First Folio version is probably the most authentic copy of Shakespeare's manuscript of a play, but the Quartos may better indicate stage directions and changes or cuts made in the course of preparing the play for performance.
No manuscript of a Shakespeare play survives, so the assumptions mentioned above are sophisticated guesswork. (There do exist three pages written by "Hand D" of a play, Sir Thomas More, which was a collaborative effort of several playwrights. "Hand D" is believed by some critics to be Shakespeare's handwriting.)
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