Answer:
Lenovo reduced the price of the model by 9% because it is what the calculations of price elasticity and cross price elasticity is telling the company to do.
A negative -12.64 price elasticity of demand means that the quantity demanded for the product falls more than the price rises. For this reason, the company found it necessary to reduce the price, in order to prevent a fall in demand.
A positive cross price elasticity of 9% means that the quantity demanded for this product will increase more than the reduction in price when compared to another product (likely a substitute, for example: a computer produced by another company). For this reason, Levono decided to lower the price, because the loss in revenue from the price reduction will be offset by the higher demand.
Based on the information given, the cross-price elasticity of demand will be -10.36.
From the complete information, the first thing to do is to calculate the change in quantity demanded. This will be:
- 12.64 = change in quantity demanded/change in price.
-12.64 = change in quantity demanded / 0.09
Change in quantity demanded = -1.14
Then, we will put the value into the cross-price elasticity of demand formula. This will be:
= -1.14/0.11
= -10.36
In conclusion, the cross-price elasticity of demand will be -10.36.
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