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; declines
D) more; increases

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; declines
D) more; increases

Maximilian Ludwig · Accepted Answer

Final Answer : C, Explanation :  As more substitutes become available, the demand facing Orange Inc. becomes more elastic because consumers have more alternatives. This increased elasticity typically leads to a decrease in the firm's ability to mark up prices over marginal cost, which is what the Lerner index measures. Thus, the Lerner index declines.

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