In an article about the financial problems of USA Today, Newsweek reported that the pa-per was losing about $ 20 million a year. AWall 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 additional $65milliona 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 USA Today, Newsweek reported that the pa-per was losing about $ 20 million a year. AWall 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 additional $65milliona 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 that the publisher and the analyst are making about price elasticity are as follows:

1. The analyst assumes that increasing the price of USA Today from 50 cents to 75 cents will result in an additional $65 million in revenue per year. This assumption suggests that the demand for USA Today is relatively inelastic, meaning that a price increase will have a minimal impact on the quantity demanded. In other words, the analyst assumes that people are willing to continue purchasing the newspaper even at a higher price.

2. On the other hand, the publisher assumes that increasing the price could lead to a sharp drop in circulation. This assumption suggests that the demand for USA Today is relatively elastic, meaning that a price increase will significantly impact the quantity demanded. The publisher refers to The Wall Street Journal's experience, which saw a drop in circulation after increasing its price to 75 cents.

In summary, the analyst assumes that the demand for USA Today is relatively inelastic, while the publisher assumes that the demand is relatively elastic.