Now Intel hires your firm to do some economic analysis of their products. In you

Question

Now Intel hires your firm to do some economic analysis of their products. In your research, you take some data and through regression analysis find that the own price elasticity of Intel’s Atom chip is -1.1. If Intel decides to reduce the price of their Atom chip by 10%, what do you predict will happen to the quantity demanded for Atom chips? Can you make an estimate of the magnitude of the change?

by Tom Foremski, “Intel’s Battle With ARM is About Making Its Future Fabs Viable,” PC World, 24 September 2012. Available at: http://www.siliconvalleywatcher.com/mt/archives/2012/09/intels_battle_w.php

Explanation / Answer

Price elasticity of demand = - 1.1

This signifies that, as price decreases by 1%, quantity demanded increases by 1.1%.

So, when price decreases by 10%, quantity demanded will increase by (1.1 x 10%) = 11%.

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