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Question from Past Microeconomics Qualifying ExamEdit

Spring 1999- Section I, Question six, George Mason University

True, False, Uncertain. Determine whether or not each of the following statements are true or false. Explain your reasoning briefly in a paragraph or two. (The explanation is often more important than the answer given). Include a carefully labeled diagram or game matrix if it helps to clarify your answer.

The ultimate monopoly product would be one whose cross elasticity of demand, with respect to any and all other products is zero.

AnswerEdit

The cross price elasticity of demand measures the percentage change in the quantity demanded of one good caused by a 1 percent change in the price of another good (See Frank 136-137 for formula, when cross price elasticity is less than 0, items are complements, when greater than 0 items are substitutes). One of the strongest factors preventing monopolies from charging higher prices is the possibility that consumers will switch to substitute products. If the cross price elasticity of demand is zero, then consumers really have no good substitutes for the produce being offered. If the product is a necessity, consumers will have to pay the asking price of the monopoly or due without the item or any substitute for the item.

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