A computer company is considering lowering the price of its laptop computer to promote sales. However, it worries that this will reduce desktop computer sales. It finds the cross product of demand to be 1.5. Are its concerns legitimate? Explain
Please provide the best answer for the statement.
Yes. A cross elasticity of demand of 1.5 indicates that there is a positive relationship between the sales of desktop computers and the change in price of laptop computers, implying that they are substitutes. This means that when the price of laptop computers falls, sales for desktop computers also fall as consumers switch over and buy laptop computers. Thus, the computer company will have to consider how much it’s willing to let desktop computer sales drop to increase sales of laptop computers, and if that would be profitable.
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