Question

Suppose Orange Inc. sells MP3 players and initially has monopoly power because there are only a few close substitutes available to consumers.
As more types of MP3 players are introduced into the market, the demand facing Orange becomes ________ elastic and the Lerner index achieved by the firm in this market ________.

A) less, declines
B) less, increases
C) more, increases
D) more, declines

Answer 1

Answer:

More Elastic ; Lerner Index Decline

Explanation:

Elasticity denotes the responsive change in a product's demand, due to change in its price. Higher the elasticity, the more quantity change due to price change, vice versa.

Lerner Index depicts the market power a firm has. Higher elasticity means consumers have many close alternatives & L is small, signify less market power. And, Vice versa case for low L.

Orange Inc players has monopoly i.e sole seller privileges in the MP3 players market, with few close substitutes. As, more types of players are introduced in the market :

• Orange Inc has more competitors & close substitute goods providers, now in the market. So, increase in substitute availability will increase the Elasticity of Orange' demand
• Increase in Elasticity means implies that consumers have many options, market power of Orange & its representative L index falls.