In September 1993, the owners of The times newspaper in London unilaterally cut

Question

In September 1993, the owners of The times newspaper in London unilaterally cut the cover price of the newspaper from 45p to 3()p. None of the other quality (broadsheet) newspapers cut their price. One year after the price cut in The times, sales of The times were up 19.1%. (The total market for broadsheet newspapers was virtually unchanged.) How would an economist describe the demand curve for The times as revealed over that 12 month period? What would have happened to the cover price revenue of The times over the 12 months following the price cut? Calculate the elasticity of demand for The times. Why didn't the other broadsheet newspapers cut their cover prices? Why might The times have left its cover price unchanged for a year?

Explanation / Answer

(a) There is a change in quantity demanded over the 12 month periodalong the SAME demand curve due to change in price. Since the pricedrops 33.33% while the sales up 19%, there will be a decrease inprice revenue of The Times over the 12 months following the pricecut. (b)Elasticity of demand = % change in quantity demanded / % changein proce     Elasticity of demand. = 19.1/33.33 = 0.57 (c) The other broadsheet newspapers didn't cut their cover pricesbecause there is no incentive for doing so. The demand fornewspaper is inelastic (elasticity of demand is less than 1). So,when the price level drops, the percentage change in quantitydemanded is smaller than that in price. Thus, when the price drops,the total revenue drops as well. The Times have left its coverprice unchanged for a year in order to find out how the drops inprice affect the sales of the newspapers. This is to provide a moreaccurate estimation on the sales of newspaper. Hope this helps!

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