Answer to Question #49830 in Economics of Enterprise for Obinna

Question

Suppose Clayton Kershaw is the best pitcher in baseball. To keep him from moving to another team the Dodgers offer him a huge raise in salary. They do not, however, raise ticket prices.

a) One friend says, "The Dodgers are idiots. They should raise prices to cover their higher costs." What do you tell her?

b) Another friend says, "The Dodgers are idiots. They should raise their prices in response to higher demand." What do you say to him?

Answer 1

Suppose Clayton Kershaw is the best pitcher in baseball. To keep him from moving to another team the Dodgers offer him a huge raise in salary. They do not, however, raise ticket prices.
a) If one friend says, "The Dodgers are idiots. They should raise prices to cover their higher costs." it is not good suggestion, because rising prices may not cover costs, as the demand may be elastic. So, it is good idea, only if demand for visiting matches of Dodgers is inelastic and increase in price will increase total revenue to cover higher costs.
b) If another friend says, "The Dodgers are idiots. They should raise their prices in response to higher demand.", it is a smart remark, as if demand rises, the price may be increased. But if the demand elastic, the price may be increased without increase in demand.