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Pricing Power Inflation

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Hi,

I have a brief question -

I am fully aware of cost push inflation and its causes - ie how it affects firm's margins forcing them to push up their product sale price etc.

I am also aware that demand pull inflation occurs where firms intend to continue producing at the same price level but are unable to meet their full demand given what they are able to supply (for example, after they have entered the labour mkt to acquire more workers they still do not have enough labour to meet their demand). So they then decide they can push their price up. basically , demand exceeds supply.

What I never come across in text books however is where a firm decides merely to increase it's price because its demand has increased (ie its demand curve has shifted outwards , therby making a higher price more attractive in terms of revenues vs costs). Clearly this is different from traditional demand pull inflation because at the point where the firm decides to increase its price(right at the start), they have not yet determined how much they are able to produce. does this make sense?

My question is, what is this third type of inflation referred to as? I'm sure it occurs in the economy, buti cant seem to find it referred to anywhere.

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A third type of inflation could be called pricing power inflation, but is more frequently called administered price inflation. It occurs whenever businesses in general decide to boost their prices to increase their profit margins. This does not occur normally in recessions but when the economy is booming and sales are ...

Solution Summary

what is this third type of inflation referred to as? I'm sure it occurs in the economy, buti cant seem to find it referred to anywhere.

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The bonds of Falter Corporation were rated as Aa1 and issued at par a few weeks ago. The bonds have just been downgraded to Aa2. Determine the new price of the bonds, assuming a 15-year maturity and semiannual interest payments.

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b) To maintain the original $6,000,000 purchasing power, how much should the lender be repaid? (Hint: Multiply the loan amount by one plus cumulative inflation).
c) If the lender knows he will receive only $6,000,000 in payment after 12 years, how might he be compensated for the loss in purchasing power? A descriptive answer is acceptable.

3. The Hardaway Corporation plans to lease a $900,000 asset to the O'Neill Corporation. The lease will be for 10 years.
a) If the Hardaway Corporation desires a 12 percent return on its investment, how much should the lease payments be?
b) If the Hardaway Corporation is able to take a 10 percent deduction from the purchase price of $900,000 and will pass the benefits along to the O'Neil Corporation in the form of lower lease payments (related to the Hardaway Corporation lower initial net cost), how much should the revised lease payments be? Continue to assume the Hardaway Corporation desires a 12 percent return on the 10 year lease.

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