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.

Well, it seems like the publisher is assuming that the price elasticity of USA Today is very high, meaning that people are sensitive to price changes and would be discouraged from buying the paper if the price increased. On the other hand, the analyst seems to assume that the price elasticity is quite low, suggesting that people would still be willing to pay the higher price for USA Today. To put it simply, the publisher is worried that readers might say "no way" to a price increase, while the analyst is hopeful that readers would say "it's just a few extra cents, why not?"

The implicit assumptions made by the publisher and the analyst about price elasticity in this scenario are as follows:

1. The analyst assumes that increasing the price of USA Today from 50 cents to 75 cents would result in an increase in revenue by $65 million a year. This assumption suggests that the demand for USA Today is relatively inelastic, meaning that a price increase would not significantly impact the quantity demanded.

2. On the other hand, the publisher assumes that if USA Today were to increase its price, the circulation could drop sharply. This assumption suggests that the demand for USA Today is relatively elastic, meaning that a price increase would lead to a substantial decrease in the quantity demanded.

Both assumptions rely on different understandings of the price elasticity of demand for USA Today. The analyst assumes a less price-sensitive demand, while the publisher assumes a more price-sensitive demand.

Both the publisher and the analyst are making implicit assumptions about price elasticity.

The publisher's assumption is that increasing the price of USA Today from 50 cents to 75 cents could lead to a sharp drop in circulation. This suggests that the publisher believes the demand for USA Today is highly elastic, meaning that a small change in price would result in a proportionally larger change in quantity demanded. In other words, the publisher assumes that consumers are very sensitive to changes in price and would be less likely to purchase the newspaper at the higher price.

On the other hand, the analyst's assumption is that increasing the price of USA Today to 75 cents would result in an additional $65 million in revenue per year. This implies that the analyst believes the demand for USA Today is relatively inelastic, meaning that a change in price would have a smaller impact on the quantity demanded. The analyst assumes that consumers would still be willing to pay the higher price and buy the newspaper, resulting in increased revenue.

So, the publisher assumes a high price elasticity of demand, suggesting that consumers are price-sensitive, whereas the analyst assumes a low price elasticity of demand, suggesting that consumers are less price-sensitive.