Question

In: Economics

Suppose that the cross elasticity of demand for Dell computers with respect to Hewlett Packard computers...

Suppose that the cross elasticity of demand for Dell computers with respect to Hewlett Packard computers is 2.1. If Hewlett-Packard lowers its price by 5 percent, other things being equal, what will be the percentage change in the quantity of Dell computers demanded?

A. -10.5 percent

B. -42 percent

C. 2.4 percent

D. 10.5 percent

Please show mathematical calculations, Thanks.

Expert Solution

Let me answer this question clearly.

Cross elasticity of demand is defined to be as the ratio of percentage change in quantity demanded of a product to percentage change in price of a related product. The related product can be its substitute or complementary product.

This is a case where both the products Dell computers and Hewlett-Packard computers are substitutes to each other.

Coming to the question,

It is given that,

Cross Elasticity of demand = 2.1

Percentage change in price of Hewlett-Packard computers = −5%, as the price has been lowered by 5%

Percentage change in quantity demanded of Dell computers = ?, let it be

Cross elasticity of demand = % change in quantity demanded of Dell computers ÷ % change in price of HP computers

2.1 = −5%

−10.5%

So, the percentage change in the quantity of Dell computers demanded is −10.5 percent which is option A.

Hope that helps.

Rahul Sunny answered 1 year ago

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