Posted by Ed on Tuesday, June 19, 2007 at 9:29pm.
I think I get this but could use some guidance to make sure, I am having problems with 2e).
1)In an article about the financial
problems of USA Today, Newsweek,
reported that the paper was losing
about $20 million a year. A Wall
Street analyst said that the paper
should raise its price from 50 cents
to 75 cents, which he estimated
would bring an additional $65
million a year. The paper’s
publisher rejected the idea, saying
that circulation could drop sharply
after a price increase, citing The
Wall Street Journal’s experience
after it increased its price to 75
cents. What implicit assumptions are
the publisher and the analyst making
about price elasticity?
ANSWER:
The analyst is using price effect
when looking at the revenue
resulting from a price increase. He
assumes that by raising the price of
a product, the increase in the price
itself would increase total revenue.
The publisher is look at price
elasticity from a quantity effect.
Where increasing the price results
in a decrease in revenue or a
decrease in demand.
2)Assume that the demand for plastic
surgery is price inelastic. Are the
following statements True or False?
Explain?
a)When the price of plastic surgery
increase, the number of operations
decreases.
ANSWER:
False, price inelastic means that an
increase in price has little effect
on the quantity demanded.
b)The percentage change in the price
of plastic surgery is less than the
percentage change in the quantity
demanded.
ANSWER:
False, in this scenario the demand
would be elastic, not inelastic.
c)Changes in the price of plastic
surgery do not effect the number of
operations.
ANSWER:
True, this is price inelastic, price
does not have an effect on
quantity demanded.
d)Quantity demanded is quite
responsive to changes in price.
ANSWER:
False, this is price elastic. A
change in price effects quantity
demanded.
e)If more plastic surgery is
performed, expenditures on plastic
surgery decrease.
ANSWER:
I’m not sure about this one (help?)
f)The marginal revenue of another
operations is negative.
ANSWER:
True. Total revenue declines when
price falls, demand is then elastic
Thanks,
EY
1) first a technical, semantics, point. A "Change in Demand" implies a shift in the demand curve. A change in price is generally a movement along the demand curve, or a "Change in Quantity Demanded"
Second, based on the statements, you could infer that the analyst thinks that the demand for Newsweek is price inelastic, while the publisher thinks it is price elastic.
2a) is TRUE. (except if plastic surgery is perfectly inelastic, which is highly unlikely). With an highly inelastic demand, an increase in price will result in a decrease in quantity demanded; just not very much.
2c) this is the same question as 2a.
2e) I understand your confusion; I think the question is short on information. Let me restate the question. "If more plastic surgery is performed BECAUSE OF A REDUCTION IN PRICE, expenditures on plastic surgery will decrease?" Answer is TRUE. Total initial expenditure is P*Q. What if the elasticity is say -.1 (highly inelastic). Then a 10% price decrease will result in a 1% change in quantity. So new expenditue is: (.9*P)*(1.01*Q). Which must be smaller than the initial total expenditure.
2f) answer is True, but your reasoning is off. If total revenue declines when price falls then demand is INELASTIC.
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