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Applications of price elasticity of demand

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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 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 a price increase, citing The Wall Street Journal's experience after its increased its price to 75 cents What implicit assumptions are the publisher and the analyst making about price elasticity?

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Solution discusses the implicit assumptions made by publisher and analyst about price elasticity of demand.

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Analyst is of the view that rise in prices will bring additional $65 million a year. He is expecting an increase in total revenue following a hike in price. It is possible in case of inelastic demand. In case of inelastic demand, ...

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  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
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