A major PC producer lowers the price of its desktop PC from $900 to $700. The sale of desktops increase by 25 percent. The store manager notices that sales of laser printers increase by 15 percent.
a. Calculate the arc price elasticity of desktop PC. Explain what it means.
b. Why have the sales of laser printers increased? Calculate the arc cross price elasticity of laser printers. Based on your calculation, is a laser printer a substitute or complement? Why?
c. Was the new policy beneficial for increasing the revenues of the producer? Explain.
d. If you were to estimate a demand equation for desktop computers, which variables would you choose as explanatory variables?