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 Wall Street analyst assumes USA Today has inelastic demand and can increase revenue by raising its price, while the publisher fears a price increase could lead to a large drop in circulation due to elastic demand, similar to The Wall Street Journal's experience.

Step-by-step explanation:

The implicit assumptions that the Wall Street analyst and the publisher of USA Today are making relate to the concept of price elasticity of demand for their newspaper. The analyst assumes that the demand for USA Today is relatively inelastic - that is, a rise in price by 50% (from 50 cents to 75 cents) will not significantly deter customers from buying the newspaper, and thus, the total revenue would increase substantially from the additional 25 cents per paper. This is estimated to result in an additional $65 million a year. On the other hand, the publisher fears that the demand is elastic, meaning that subscribers are sensitive to price changes. The publisher cites The Wall Street Journal's experience to suggest that a significant price increase might result in a sharp drop in circulation, as subscribers may find alternatives or deem the new price not worth the product.

Newspapers, in general, face competition from various forms of digital and free media, causing a shift in how they operate and make money. While the circulation revenue is crucial, newspapers have been expanding their internet presence and digital pay plans to sustain profits amidst declining ad revenues from print versions. The success of The Wall Street Journal in maintaining an electronic readership after erecting a paywall indicates that strategic digital offerings can partially offset losses from print.

Answer 2

Answer: See explanation

Step-by-step explanation:

The implicit assumptions that is masde by the publisher is that price elasticity is elastic. This implies that a change in price has a large impact on the quantity demanded. In this case, an increase in price will bring about a large reduction in demanded.

On the other hand, the analyst believee the price elasticity is inelastic. This means price change will have a little or no change in the quantity demanded.