Question

A newspaper recently lowered its price from $7.00 to $5.00. As it did, the number of newspapers sold increased from 260,000 to 300,000.

a. What was the newspaper’s elasticity of demand?

Instructions: Enter your response rounded to two decimal places.

Price elasticity of demand is  .

b. Given that elasticity, did it make sense for the newspaper to lower its price?

Demand is   (Click to select)   inelastic   elastic    so it   (Click to select)   does   does not  make sense to lower the price because it   (Click to select)   increases   reduces  total revenue.

c. What would your answer be if much of the firm’s revenue came from advertising and the higher the circulation, the more it could charge for advertising?

Answer 1

a) price elasticity of demand= percentage change in price/ percentage change in quantity demanded.

Percentage change in price = (5-7)5* 100

= -40= 40% decrease

Percentage change in quantity demanded = 300000-260000/260000*100

=15.38462 % Increase

Elasticity of demand= 15.38462/-40=-0.38

b) Demand is inelastic. So lt doesn't make sense to lower the price because it reduces total revenue.

( When elasticity coefficient is less than one, demand is inelastic. So change in price in price would lead to a less than proportionate change in quantity demanded. Impact of change price on revenue will be greater than the impact of change in Quantity demanded on the Revenue. So decreasing price won't be a wise decision.)

c) Then the firm could have went ahead with the decision to decrease prices. Decrease in price would have led to more circulation. Higher the circulation, higher the revenue from advertising . Overall revenue of the firm could have been raised eventhough demand was inelastic.