1. In Town A there is only one newspaper, Daily Outrage. The demand for the paper depends on the price and the amount of scandal reported. The demand function is Q = 15SZP-3 where Q is the number of issues sold per day, S is the number of column inches of scandal reported in the paper, and P is the price. Scandals are not a scarce commodity in town A, but it takes resources to write, edit, and print stories of scandal. The cost of reporting S units of scandal is £10S and is independent of the number of papers sold. In addition, the cost to print and deliver the paper is £0.10 per copy and is independent of the amount of scandal reported in the paper. (a) Calculate the price elasticity of demand. Explain whether the price elasticity depends on the amount of scandal reported and whether the price elasticity is constant over all prices. Comment on the price sensitivity of the readers of the Daily Outrage. (b) Calculate the profit maximising price using the formula that writes marginal revenue as a function of price and price elasticity, and the first order condition for profit maximisation. (c) Assuming that the Daily Outrage charges the profit maximising price calculate output and profits as a function of columns of scandal S and the determine the units of scandal that will maximise the profits of the newspaper.
1. In Town A there is only one newspaper, Daily Outrage. The demand for the paper depends on the price and the amount of scandal reported. The demand function is Q = 15SZP-3 where Q is the number of issues sold per day, S is the number of column inches of scandal reported in the paper, and P is the price. Scandals are not a scarce commodity in town A, but it takes resources to write, edit, and print stories of scandal. The cost of reporting S units of scandal is £10S and is independent of the number of papers sold. In addition, the cost to print and deliver the paper is £0.10 per copy and is independent of the amount of scandal reported in the paper. (a) Calculate the price elasticity of demand. Explain whether the price elasticity depends on the amount of scandal reported and whether the price elasticity is constant over all prices. Comment on the price sensitivity of the readers of the Daily Outrage. (b) Calculate the profit maximising price using the formula that writes marginal revenue as a function of price and price elasticity, and the first order condition for profit maximisation. (c) Assuming that the Daily Outrage charges the profit maximising price calculate output and profits as a function of columns of scandal S and the determine the units of scandal that will maximise the profits of the newspaper.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:1. In Town A there is only one newspaper, Daily Outrage. The demand for the paper depends
on the price and the amount of scandal reported. The demand function is Q = 15SZP-3
where Q is the number of issues sold per day, S is the number of column inches of scandal
reported in the paper, and P is the price. Scandals are not a scarce commodity in town A,
but it takes resources to write, edit, and print stories of scandal. The cost of reporting S
units of scandal is £10S and is independent of the number of papers sold. In addition, the
cost to print and deliver the paper is £0.10 per copy and is independent of the amount of
scandal reported in the paper.
(a) Calculate the price elasticity of demand. Explain whether the price elasticity depends
on the amount of scandal reported and whether the price elasticity is constant over all
prices. Comment on the price sensitivity of the readers of the Daily Outrage.
(b) Calculate the profit maximising price using the formula that writes marginal revenue as
a function of price and price elasticity, and the first order condition for profit maximisation.
(c) Assuming that the Daily Outrage charges the profit maximising price calculate output
and profits as a function of columns of scandal S and the determine the units of scandal
that will maximise the profits of the newspaper.
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