Sub: Economics

Topic: Micro Economics

Question: Analysis of Price elasticity & price increase - implicit assumptions made by the publisher regarding the decision
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for increasing the price
In an article about the financial problems of the 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 to .75, which he estimates would bring in an additional 65 million a year. The paper’s publisher rejected the idea, saying that the circulation could drop sharply after the price increase, citing that the wall street journal’s experience after it increased its price to .75. What implicit assumptions are the publisher and the analyst making about price elasticity.

Solution:
The analyst estimates that a price increase from 0.5 to 0.75 raises revenues by 65 million. He thus does not factor in the possibility of change in demand. Hence he assumes that the demand remains unchanged in spite of any change in price. He thus assumes complete price inelasticity of the demand curve. This is shown below:

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Sub: Economics

Topic: Micro Economics

The horizontal axis measures the quantity demanded and the vertical axis the price. D is the demand curve. Clearly with change in price the amount demanded does not change. Hence demand is price inelastic. Only revenue increases as the analyst said.

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ClassOf1 provides exert guidance for College, Graduate and High school homework and live online tutoring on subjects like Finance, Marketing, Statistics, Economics and others. Check out more solved problems in our Solution Library.

www.classof1.com

*The Homework solutions from ClassOf1 are intended to help the student understand the approach to solving the problem and not for
submitting the same in lieu of your academic submissions for grades.

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