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Analyzing elasticities of demand

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Suppose that the demand for Dell laptop computers) can be characterized by the following point elasticities: (own) price elasticity = -1.9, cross-price elasticity with computer printers = -2, and income elasticity = +1.1. Based on these numbers answer the following questions. Explain your answers and show your work.

a.If the goal of Dell was to increase total sales revenue (ignoring cost considerations), would it raise or lower its selling price? Why?

b.What would happen to the demand for Dell laptop computers if the price of computer printers fell by 3%? Are the two goods substitutes or complements? Explain your answer.

c.What would happen to the demand for Dell laptop computers if consumer income rose by 4%? Be specific. Are laptop computers a normal or an inferior good? Explain.

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Solution describes the steps for forecasting behavior of demand of Dell laptop computers based upon cross, price and income elasticities of demand.

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Solution:

a.If the goal of Dell was to increase total sales revenue (ignoring cost considerations), would it raise or lower its selling price? Why?

Here absolute value of price (own) elasticity of demand is greater than 1. It implies that demand is relative elastic. So, price should be decreased to increase total sales revenue.

b.What ...

Solution provided by:
Lokesh Jain, MSc
Education
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
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