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?
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The cross elasticity of demand determines the change in demand of a commodity as the price of a comparable commodity changes. For the given case, the cross elasticity of demand will measure the change in demand of Dell computers as the price of Hewlett Packard computers changes.
In this case: Qd/Php = 2.1
where, Qd is the change in demand of Dell computers and Php is the change in price of HP computers.
Since the cross elasticity of demand is >0 (positive), the two goods are substitute goods, i.e. they can replace each other.
Given, change in HP computer's price = -5% (lowering of price) = -0.05
Using the given cross elasticity of demand,
change in demand of Dell computers = -0.05 x 2.1 = -0.105 or -10.5%
That is, a lowering of price of HP computers by 5% will cause a 10.5% reduction in demand for Dell computers.
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