Suppose that your firm was accused of illegally conspiring with other sellers to act as a monopolist. In searching for an expert witness, you discover one economist who has calculate the cross elasticity of demand for your industry's product to be+2.05, while another economist has calculated the cross elasticity of demand to be +0.43. Which econimist whould your hire testify on behalf of your firm? Explain your answer
Take a shot.
Note that a +2.05 cross price elasticity means that if the price of some particular other product goes up by 1%, the demand for the firm's product (at the prevailing price) will go up by 2.05%. Compare this to an alternative measure of +0.43 Which econmist thinks the firm makes a product that has "good" substitutes?
To determine which economist to hire as an expert witness on behalf of your firm, you need to compare their calculations of cross elasticity of demand and consider the implications.
Cross elasticity of demand measures the responsiveness of the quantity demanded of a product to a change in the price of another product. A positive cross elasticity indicates that the two products are substitutes, meaning an increase in the price of one leads to an increase in demand for the other.
In this case, the economist who calculated a cross elasticity of demand of +2.05 suggests that your firm's product has a strong substitutability with the other product. A 1% increase in the price of the other product leads to a 2.05% increase in demand for your firm's product. This is a significant response and implies a high degree of substitutability and competition between the two products.
On the other hand, the economist who calculated a cross elasticity of demand of +0.43 indicates a lower substitutability and competition between the products. A 1% increase in the price of the other product results in only a 0.43% increase in demand for your firm's product. This suggests that the firm's product may have fewer close substitutes and faces less competition.
Considering the accusations of illegal conspiracy and acting as a monopolist, it is more favorable for your firm's case to hire the economist who calculated a higher cross elasticity of demand (+2.05). This economist's findings imply that your firm faces strong competition and has substitutes available in the market, which weakens the argument of monopolistic behavior.
Therefore, you should hire the economist who calculated a cross elasticity of demand of +2.05 to testify on behalf of your firm as it provides a more favorable perspective and counters the accusations of monopolistic behavior.