Share
Explore BrainMass

The cross-price elasticity

The demand for personal computers can be characterized by the following point elasticity = -5, cross-price elasticity with software = -4, and income elasticity = 2.5. Indicate whether each of the following statements is true or false, and explain your answer.

A. A price reduction for personal computers will increase both the number of units demanded and the total revenue of sellers.

B. The cross-price elasticity indicates that a 5 percent reduction in the price of personal computers will cause a 20 percent increase in software demand.

C. Demand for personal computers is price elastic and computers are cyclical normal goods.

D. Falling software prices will increase revenues received by sellers for both computers and software.

E. A 2 percent price reduction would be necessary to overcome the effects of a 1 percent decline.

Solution Preview

A. A price reduction for personal computers will increase both the number of units demanded and the total revenue of sellers.
True. The price elasticity is negative that means when prices go down, quantity demanded will go up. Again, the absolute value of price elasticity is greater than 1 which means that decraese is price is more than compensated by the increase in quantity and hence the total revenues will increase.

B. The cross-price ...

Solution Summary

The cross-price elasticity is reported.

$2.19