In an article about the financial problems of USE 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 in 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?

Question

In an article about the financial problems of USE 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 in 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 1

The implicit assumptions about price elasticity made by the publisher and the Wall Street analyst can be inferred from their comments in the given scenario.

The Wall Street analyst's suggestion to raise the price of USE Today from 50 cents to 75 cents is based on the assumption that the demand for the newspaper is inelastic. This means that the analyst believes that even with a price increase, the demand for the newspaper will not decrease significantly. The analyst predicts that the price increase would result in an additional $65 million in revenue per year, suggesting that the demand for the newspaper is relatively unaffected by price changes.

On the other hand, the publisher's rejection of the idea is based on the assumption that the demand for USE Today is elastic. The publisher argues that increasing the price could result in a sharp drop in circulation. The publisher cites The Wall Street Journal's experience after it raised its price to 75 cents as evidence. This suggests that the publisher believes that consumers are price-sensitive and may reduce their demand for USE Today if the price is increased.

In summary, the implicit assumptions about price elasticity are as follows:
- The Wall Street analyst assumes that the demand for USE Today is inelastic, meaning that a price increase will not significantly impact the demand.
- The publisher assumes that the demand for USE Today is elastic, meaning that a price increase will result in a significant decrease in demand.