Question

Which of the following would indicate a relatively large amount of market power? Select one: a. Highly price elasticity demand b. Low cross-price elasticity with other products c. Low Lerner index

Answer 1

Answer: The correct answer is "b. Low cross-price elasticity with other products.".

Explanation: In the case "a)" although it has a high price, the demand is elastic, so a change in the price causes a more than proportional change in the quantity demanded.

In the case "b)" Cross elasticity is a measure of the sensitivity of the demand for a good or service to the variation in the price of another good or service. So being low would indicate a relatively better position in the market.

In the case "c)" the lerner index measures the control capacity over a market, so being low indicates less market power.