posted by Monnie on .
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 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?
Analyst: low elasticity / low price sensitivity: people won't react to the increase in price by not buying it, so revenue will increase.
Publisher: high elasticity / high price sensitivity: people will react strongly to the price hike, so the gain in revenue from increasing price will be offset by the drop in revenue from fewer sales.