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

The publisher and the analyst are making implicit assumptions about price elasticity of demand. Price elasticity of demand measures the responsiveness of demand to a change in price. To understand the assumptions made by the publisher and the analyst, let's break down their positions:

1. The analyst suggests raising the price from 50 cents to 75 cents, estimating it would bring in an additional $65 million a year. This implies that the analyst assumes a relatively inelastic demand for USA Today, meaning that even with a price increase, the demand for the newspaper will not decrease significantly, resulting in increased revenue.

2. The publisher rejects the idea, suggesting that circulation could drop sharply after a price increase. The publisher is implying a more elastic demand for USA Today, meaning that a price increase would result in a significant decrease in demand, potentially leading to lower overall revenue.

So, the implicit assumptions are as follows:

- The analyst assumes that demand for USA Today is relatively inelastic, meaning consumers are not highly sensitive to price changes. This assumption is based on the belief that increasing the price by 25 cents (50 cents to 75 cents) will not cause a substantial decrease in demand.

- The publisher assumes that demand for USA Today is relatively elastic, meaning consumers are more sensitive to price changes. This assumption is based on the belief that increasing the price could result in a significant drop in demand, potentially offsetting any increase in revenue.

It's important to note that the actual price elasticity of USA Today's demand would require empirical analysis and data to determine accurately.