Share
Explore BrainMass

Implicit Assumptions on Demand Elasticity

OTA, I request your assistance on several economic problems for practice to gain knowledge. Please help, thank you.

A) In an article about the financial issues of USA Today, a major magazine reported that the newspaper was losing about $20 million a year. A financial analyst said that the paper should raise its price from 50 cents to 75 cents, which she estimated would bring in an additional $65 million a year. The newspaper's publisher rejected the idea, indicating the circulation for the newspaper could drop sharply after a price increase, citing another major newspaper's (Denver Times) experience after it increased its price to 75 cents. What implicit assumptions are the publisher and the analyst making about the demand elasticity? Explain your response in your own words with several paragraphs with an answer.

B) As one strolls along the cereal aisle at the supermarket, notice the many diverse types of cereals on the shelves. One will most likely see General Mills' Wheaties, Total, and Cheerios, while there is Kellogg's Corn Flakes, Oat Bran, Frosted Rice and Frosted Flakes. Next, there is Post's Super Golden Crisp, and Quaker Oats, Captain Crunch, Honeycomb, and Alpha Bits to name only a few. There are many different brands of the same product cereal on the shelves. Each brand is slightly different from the others. Is the breakfast cereal industry's market structure monopolistic competition or oligopoly? Explain your response in your own words with several paragraphs with an answer.

C) At the movies, adults pay a higher ticket price than children. However, when adults and children go to the concession stand, both groups pay the same amount for popcorn and other snacks. Which of the following statements best describes why price discrimination stops at the ticket window? 1) The demand for popcorn is perfectly elastic. 2) The theatre has no way to divide the buyers of popcorn based on different price elasticity's of demand. C) The theater can not prevent resale. Explain your response in your own words with several paragraphs with an answer.

D) As a businessman, you are considering building a Rent Your Own storage facility in Nevada. You are trying to decide whether to build 50 storage units at a total economic cost of $200,000, 100 storage units at a total economic cost of $300,000, or 200 units at a total economic cost of $700,000. If you wish to survive in the long term, which size would you select? Explain your response in your own words with several paragraphs with an answer.

E) Professor Alexander of El Paso is contemplating leaving the university and opening a consulting business. For her services as a consultant, she would be paid $75,000. To open the business, she must convert her home from which she collects rent of $10,000 per year into an office and hire a secretary at a salary of $15,000 per year. Also, she must withdraw $10,000 from her savings for miscellaneous expenses and forgo earning 10% interest per year. The university pays her $50,000 a year. Based only on economic decision making, do you predict the professor will leave the university to start a new business? Explain your response in your own words with several paragraphs with an answer.

F) California Beach, North Carolina is lined with virtually identical motels. Summer rates run about $200 per evening. During the winter months, one can find rooms for as low as $50 per night. Assume the average fixed cost of a room per night, including cleaning services and linens, is $45. Would these motels be better off renting rooms for $50 in the off season or shutting down until summer? Explain your response in your own words with several paragraphs with an answer.

Solution Preview

a) The publisher is making the assumption that the demand for newspaper is highly elastic, due to which the price increase will be accompanied by a heavy decline in the demand of the newspaper. The opinion of the publisher is based on the experience of the other newspaper.

The analyst has a different opinion. He feels that the demand of the newspaper is perfectly inelastic or atleast, highly inelastic and believes that the price rise will not be accompanied by any decline in demand. In my opinion, analyst believes that the loyal readers of newspaper are unaffected by its price and will continue to read the newspaper and will be willing to pay the higher price.

b) The market for cereals can be categorized under Monopolistic competition, ie, ?many sellers, free entry?but with differentiated products. There are many companies selling cereals and can easily enter the market. However, there is slight differentiation in the products of these ...

Solution Summary

In an article about the financial issues of USA Today, a major magazine reported that the newspaper was losing about $20 million a year. A financial analyst said that the paper should raise its price from 50 cents to 75 cents, which she estimated would bring in an additional $65 million a year. The newspaper's publisher rejected the idea, indicating the circulation for the newspaper could drop sharply after a price increase, citing another major newspaper's (Denver Times) experience after it increased its price to 75 cents. What implicit assumptions are the publisher and the analyst making about the demand elasticity? Explain your response in your own words with several paragraphs with an answer.

$2.19