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?

Question

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?

Answer 1

unable to answer

Answer 2

The implicit assumptions made by the publisher and the analyst about price elasticity are related to the responsiveness of demand to a change in price. Price elasticity of demand measures the percentage change in quantity demanded in response to a percentage change in price.

The analyst's assumption is 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 change in price would not significantly impact the quantity demanded. The analyst believes that even with the price increase, the majority of readers would continue purchasing the paper.

On the other hand, the publisher's assumption is that a price increase could lead to a significant drop in circulation, based on the Wall Street Journal's experience. This assumption implies that the demand for USA Today is relatively elastic, meaning that a change in price would have a significant impact on the quantity demanded. The publisher anticipates that consumers may choose alternative newspapers or digital news sources if the price of USA Today increases.

Both the publisher and the analyst are making implicit assumptions about the price elasticity of demand for USA Today. The analyst assumes that demand is relatively inelastic, while the publisher assumes that demand is relatively elastic. Each assumption has different implications for the potential impact of a price increase on the newspaper's revenue and circulation.